Ethics In Business And Corporate Governance 1259004856, 9781259004858

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Ethics In Business And Corporate Governance
 1259004856, 9781259004858

Table of contents :
1 Introduction to Ethics and its Applications in Business
2 Principles of Ethics
3 Law, Ethics and Business
4 Ethics: Individuals and the Organisation
5 Ethics in Marketing and Consumer Protection
6 Professional Ethics
7 Ethics and the Environment
8 Ethical Issues of Some Contemporary Topics and Technological Developments
9 Corporate Governance: Principles and Practices
10 Corporate Governance: The Indian Scenario
11 Ethics and Corporate Governance
12 New Paradigms in Corporate Governance: Ethics, CSR and Sustainability

Citation preview

About the Author Smarajit Kr Mandal is a Ph. D in Engineering from the University of London, UK. He is an FIIM (Fellow of the Indian Institute of Metals), FIE (Fellow of the Institution of Engineers) and the former Director (Scientific Services), Tata Steel Ltd., Jamshedpur. Presently he is a Management Consultant, Mentor and Academician based in Kolkata. Dr. Mandal served the leading Tata Group of companies at Jamshedpur— namely Tata Motors and Tata Steel—for over 32 years in various capacities, and retired from a senior management position at Tata Steel. He has vast industry experience and exposure to senior management functions, and has been simultaneously associated with teaching and academic developments at leading national institutions such as IIT-Kharagpur. His vast industry experiences coupled with academic interests led him to work post-retirement in the field of management education. He has published many books in this field, notably in the areas of managerial effectiveness, total quality management, and management principles and practice. The present book on Ethics in Business and Corporate Governance is an outcome of his endeavour to fill the gap in this series of books connecting ‘Total Quality – Business – & Ethics’ (for management studies)—by blending his industry experiences, insights, information and perceptions with the knowledge from hitherto published materials and basic theories of ethics.

Smarajit Kr Mandal Visiting Faculty & Management Consultant Formerly Director (Scientific Services),Tata Steel Ltd., Jamshedpur

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Tata McGraw-Hill Published by Tata McGraw Hill Education Private Limited, 7 West Patel Nagar, New Delhi 110 008. Ethics in Business and Corporate Governance, 2/e Copyright © 2012, 2010 by Tata McGraw Hill Education Private Limited. No part of this publication may be reproduced or distributed in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise or stored in a database or retrieval system without the prior written permission of the author. The program listings (if any) may be entered, stored and executed in a computer system, but they may not be reproduced for publication. This edition can be exported from India only by the publishers, Tata McGraw Hill Education Private Limited. ISBN (13): 978-1-25-900485-8 ISBN (10): 1-25-900485-6 Vice President and Managing Director: Ajay Shukla Head—Higher Education Publishing and Marketing: Vibha Mahajan Publishing Manager—B&E/HSSL: Tapas K Maji Associate Sponsoring Editor: Hemant K Jha Associate Development Editor: Amrita Marik Editorial Researcher: Silvi Dua Executive (Editorial Services): Yogesh Kumar Senior Production Manager: Manohar Lal Senior Production Executive: Atul Gupta Marketing Manager: Vijay Sarathi Assistant Product Manager: Daisy Sachdeva Graphic Designer (Cover Design): Meenu Raghav General Manager—Production: Rajender P Ghansela Manager—Production: Reji Kumar Information contained in this work has been obtained by Tata McGraw-Hill, from sources believed to be reliable. However, neither Tata McGraw-Hill nor its authors guarantee the accuracy or completeness of any information published herein, and neither Tata McGraw-Hill nor its authors shall be responsible for any errors, omissions, or damages arising out of use of this information.This work is published with the understanding that Tata McGrawHill and its authors are supplying information but are not attempting to render engineering or other professional services. If such services are required, the assistance of an appropriate professional should be sought. Typeset at Bharati Composers, D-6/159, Sector-VI, Rohini, Delhi 110 085, and printed at Sai Printo Pack, A-102/4, Okhla Industrial Area, Phase – II, New Delhi 110 020 Cover Printer: Sai Printo Pack RAZQCRDHRBABC The McGraw-Hill Companies

Preface to the Second Edition In this strife-torn world—full of conflicts, corruption, complicity, coercion and (unhealthy) competition affecting the stability of economic state, fairness of governance, sustainability of business and welfare of the society—ethics are on everyone’s lips. Governments, regulators, corporations, federations of business organisations, associations of professionals, and institutions of learning are all coming out with the suggestion of ‘need for ethics’ and ‘code of ethics’.Yet, ethics in business, governance and society remain illusive! We continue to hear almost daily about scams in business and financial market; delay or denial of justice in governance; deprivation of rights of the underprivileged and poor in the society; unethical business deals; complicity in market operations; insider trading in capital market; curtailment of price of products; and many other unethical acts and actions that continue to cause sufferings to the society and common people. Greed and rush for making money by powerful actors in business, politics and society is creating wider divide between rich and poor, and imbalances in social and national growth. The welfare of the society, stability of the state and the concept of business as ‘an institution of economic well-being for the society’ are being challenged daily by streams of unethical actions and activities. We all agree to the urgent need for ethics in the society, marketplace, business operations, corporate governance, administration of systems, applications of laws and any other field of activities that touches and affects our lives; yet violation of ethics is very common and rampant. There could be many reasons for such a state of affairs today, which is not confined to India alone but is found across the world. There could be disagreement too about such reasons amongst experts, but one thing is clear that these are not due to lack of laws, regulations or systems. It is happening because individuals—the actors on the platforms of our society, business and governance—are bent upon to circumvent laws and regulations and are often not inclined to behave legally, morally or ethically. Ethics cannot be imposed from outside; it is a matter of internal realisation, appreciation and feeling about good and bad, fair and unfair, and just and unjust. Ethics have to be within us, guiding our morality, moral responsibility and moral values and making us think, act and work with honesty, dignity, integrity and (positive) creativity. Ethics are the expression of one’s goodself; ethics (ethical standards, for that matter) are the expression of a society’s commitment to goodness of all its members. Similarly, ethics have to be the expression of ‘goodness’ of business

Preface to the Second Edition

leaders and managers’ commitment to ‘fairness and justice’ for all its stakeholders. It is time to recognise that ‘good business’ is not for self-serving; inter alia it should serve the society, because it is interdependent on the society for survival and sustainability. Therefore, ethics in business—and corporate governance, for that matter—should embrace ways and means to find (or establish) these expressions of ethics in business operations and governance. Analyses of events, happenings and ethical expectations of society from the business indicate that there is need for radical change in the direction of business operations and governance by: (a) redefining the purpose of business and re-examining the morality of business goals, (b) re-positioning or re-engineering the processes of business for more inclusivity with social needs, (c) re-emphasising the importance of quality and morality of individuals who act on behalf of the business, (d) reinventing and re-employing the moral and creative potential of individuals in the business for creating ‘true value’ for the society and nation, and (e) redrawing the lines of corporate governance—not only for abiding the laws and regulations for conformity or profitability but also for the benefits of society, sustainability and sustainable developments. Ethics have to be integrated into the policy-making and operational processes of business enterprises as a core discipline, especially in areas of dealings with finance, market, human resource, environment and governance. A change in viewing business from self-serving commercial organisation with limited liability to ‘holistic’ economic institution with total responsibility for the well-being of all concerned (i.e. stakeholders of the business) for long-term sustainability is urgently necessary. Ethics demand integration of social and environmental needs into the business purposes as a matter of ‘locked-in safety-support’ from the big-brothers—the Society and the Environment (natural), called the second God of modern time—for sustainability. This calls for ‘total transformation’ of business and corporate governance culture by seamlessly infusing ethics into the business. Ethics being an ‘internalisation of morality’, as are our habits, it is hard to change once malformed. One of the easiest ways of infusing ethics into the people and business could be to start teaching ‘morality and moral issues’ to students early in their career in order to develop the sensitivity to ethics, and then impart well-designed ethics courses to all business studies and management education. Learning route to ethics through sustained and focused education is essential for today’s business studies if we have to move forward to make the business a safe, secured and sustainable institution of economic well-being for the society at large. The first edition of this book—Ethics in Business and Corporate Governance—was designed and structured to broadly serve this purpose. Now, the second edition is being brought out to further strengthen that purpose by incorporating many new topics and additional features—as suggested by experts and faculties of ethics. Initial contents and structure of the book had been based on what I perceived as the needs of students if I were a student now. I am very much encouraged by the positive reviews and responses of the market and users of this book, i.e., the students and faculties. Encouraged by the response, the publishers of the book—Tata McGraw Hill Education—have decided to take further this book by bringing out the second edition. In accordance to their natural drive and commitment to continuous improvement of educational products, the publishers collected feedback on this book from a large number of experts and faculties in the country. They have collected suggestions for inclusion of some more topics in the book to make it more useful to

Preface to the Second Editio

the students of management and make it unique in the market for the practising professionals from industries and business. The second edition, containing all suggested topics and few more, is aimed at making this book more comprehensive and contemporary by filling the gaps from the first edition, but without allowing the book to lose its original fervour and flavour. The author and the publishers thank all the reviewers for their valuable comments and suggestions and also hope that their efforts will be proved very useful to the students, faculties, professionals and others interested in ethics of business and in ethical corporate governance.We will feel vindicated and gratified by their positive response to this new edition. Smarajit Kr Mandal

Preface to the First Edition Historically, it is said that ‘Empires down the history have been known to get built only to be lost subsequently’. This has proved true for the business empires too over the years of business history, especially for those that got built on self-serving motives and unethical practices. Many corporate giants got lost in history sooner than later—only for failing to be ethical and visionary in their conduct of business practices. Recent examples of business empires lost due to alleged unethical practices are Enron, WorldCom, Satyam, and Arthur Anderson—the one-time global leaders of business in their respective fields. There are many such examples in every part of the world, and they all tell the same story time and again. No doubt, many business enterprises got buried in the history due to their failure to change with changes in technology, market dynamics and business environment, but the most notable cause for lost business empires over the centuries has been unethical behaviour and poor corporate governance. Enron Corporation—one of the largest energy companies of the world in the US—went bankrupt in November, 2001, due to accounting fraud and unethical business practices through the 1990s, taking along with it Arthur Anderson—the fifth largest accounting firm in the world. The incident impacted the whole business world and brought to the fore the urgent need for stricter disclosure norms and compliance to ethical standards in business practices. Enron became the symbol of ethical scandal and misconduct in the history of global business. The incident shook the confidence of the investing public regarding functioning of business enterprises. Governments and regulatory authorities around the world sat-up in dismay and hurriedly enacted or enforced laws and codes of conduct and governance in industries and businesses for protecting the interests of stakeholders and society. All professional institutions, regulatory bodies and large corporate houses enforced their own set of ethical standards of practice and ethical conduct of profession or business. Ethics came to be recognised as a subject of paramount importance for successfully doing business in a free market environment. Unfortunately, business world and its regulators did not learn enough from the Enron fiasco, as it became evident from similar scandals at Satyam Computer Services Ltd. in India as late as in December, 2008. The media in India and the USA came out with the startling discovery of a stunning corporate fraud by Satyam Computer Services Ltd.—one of the largest computer service providers in India with listing in New York Stock Exchange. It was alleged that Satyam

Preface to the First Edition

cooked the account books, diverted money to other family business and fictitious accounts, and inflated revenues and profits for several years with the alleged help of its auditor. The scandal had the typical watermark of the Enron fiasco. Over 300 years of industrialisation dotted with a number of ethical scandals, and their impact on public and modern societies brought to the fore the urgent need for ethical conduct of governance, profession and business.What we learn from the repetitive ethical failures in large and apparently well-managed companies throughout the world, and their huge damaging impact on investing public and society, is the indisputable need for ethics and ethical standards in business. Ethics in business practices and an ethical approach to corporate governance have been proved time and again as essential ‘means and mechanism’ to curb malpractices, infringement of rights and justice, and to promote the direction of duties and responsibilities of business for a balanced and sustainable social and economic growth. Ethics and development of a society are closely related. John Samuel said: ‘Development is the expansion of human freedom to enjoy and sustain life and environment’. In the same spirit, ethics can be described as expansion of human freedom to enjoy a fair, equitable and just life. In this industrialised world, much of these accomplishments depend on how industries and businesses are serving these causes. Inwardly focused business theories for profits often ignore ethicality and ethical standards, thereby harming the interests of people involved with the business, as well as others in the society—on whose strength business can sustain and gain. Profit driven business policy often fails to ensure ethical practices and priorities that include the spirit of ‘inclusive welfare’ of all concerned with the business, the nation and the society. Ethics and ethical conduct in business are the exclusive means to foster partnerships between the business, individuals, government, and the society for ensuring a just, fair, and morally correct agenda for holistic socio-economic developments and growth. Ethics and ethical practices are crucial since business and society are interdependent, and welfare of one is not complete without the other also benefiting from it. Ethics is a conduit between business and the society through which flows the well-being and welfare of all stakeholders, which has to be the essential outcome of business for inclusive development and growth. It is in this background that the contents of this book have been developed; a large number of cases from the business and society—as reported in newspapers—have been analysed and inferences have been drawn on the role of ethics in business and society for fairness, equity, morality and justice. The contents and concepts have been exhaustively illustrated with examples mostly from the Indian business context, and some well-publicised cases of the USA. Along with corporate cases, many examples have been cited from Government actions, because ethics matter to all organisations—industry, government or institution—all having similar mechanisms of decision-making and norms for governance.The critical role of ethics in business and corporate governance for emulating ‘best practices’ and sustained wellbeing has been emphasised upon time and again. The recent collapse of many giant financial corporations in the USA and elsewhere in 2008, and the resultant global economic meltdown, is a terse reminder of ethical failures. Steps for ethical conduct of business and corporate governance enforced so far in the business world have not been adequate to protect the rights and interests of all stakeholders. As a further consequence, a large part of our society is under constant threat of wealth erosion, exploitation, ecology destruction and environmental damages from unethical business practices

Preface to the Fi

and inadequate corporate governance, which is in effect endangering the future of mankind. Hopefully, business world will re-learn from its failures and make ethics an integral part of planning and mapping the route to ‘true value creation and enduring success’ in business, and in this respect, the role of good corporate governance is paramount. This book aims to provide insights into the complexities of moral and ethical issues in society and business, and discusses them with respect to principles of ethics, role of ethics in business, necessity for ethical conduct in profession, and necessity of ethical and effective corporate governance for sustainable growth and development of both economy and society. In the perspective of broader purpose of business, the book emphasises upon the relevance and importance of ethics in fostering the relationship between the business and the society. The book keeps reminding the readers that the hallmark of ethics and ethical governance is: ‘do good to do well’. Disclaimer A number of cases have been referred to in this book during the course of discussions. In some of these cases, names of a few companies or individuals in those companies have come up in the discussion for illustrations. These names have been obtained from the media reports and Internet that are widely published and accessible sources to all, and author or the publisher has no malicious intention of passing judgment about their guilt or otherwise. It is appreciated that some of these cases are at present merely allegations, which are still to be proved in a court of law. Nonetheless, the importance of these cases and their overwhelming publicity and wide coverage in the print and electronic media cannot be ignored. Therefore, it is beneficial to use them for illustration or as learning materials for readers. These cases have been presented here entirely from the learning point of view and names and allegations, as reported in the media, have been retained to add value and authenticity to the cases for study. Smarajit Kr Mandal

Acknowledgments If a subject has to be substantiated, it would require knowledge, information and lots of supporting material. The primary sources of my supporting materials that I have referred to, discussed and analysed in this book have come from various reports, coverages, articles, special reports, and writings by eminent personalities and experts in different newspapers and journals nationally and internationally. I am, therefore, indebted to this ‘news industry’ for being valuable to me, in general, for this book. But, I would like to particularly thank The Telegraph, Kolkata, The Economic Times, Kolkata, The Times of India, Kolkata & Mumbai, and Financial Times, USA, for their rich coverage which contributed to my efforts in dealing with the very sensitive and ‘view-centric’ subject of ‘Ethics and Corporate Governance’. I deeply appreciate their depth and width of coverage, and gratefully acknowledge their contributions. I have acknowledged them as sources wherever possible, and without their contribution, this work would not have been what it is now. In fact, almost all my views and logic got incubated and developed by specially following these four reputed newspapers, though in many cases I had lost track of details of the report and had to resort to support from the web later during writing for references. My profound thanks to these ‘particular four print-media’ as referred to earlier and the contributors to these papers for their extremely valuable contributions to my understanding of the causes and effects of social injustice, environmental damages, and economical fallacies for a sustainable world. My thanks are also due to various internet reports, blogs and publications that came handy for references and proved very useful source of information. My thanks to all the contributors of the internet world whose works have been referred to in this book. I especially wish to acknowledge the contributions of ‘Wikipedia, the free encyclopaedia’ in providing with some very basic information about different cases and occurrences or knowledge on topical subjects. Information could be as good as it could be effectively used, which is a skill that comes from past experiences and learning. My learning and experiences of using information for management purpose had been with two great Tata Group of companies—Tata Motors Ltd., and Tata Steel Ltd., Jamshedpur. At Tata Steel, I had the opportunity to be a part of the Management Committee and experienced the course and results of a business where values, mission, ethics, concern for people and the society, and ‘total quality’ as work culture got upper most attention. My ability to see issues of ethics and governance from social, business and people-angle had


origin at Tata Steel. I am grateful to the company—especially to Dr. J.J. Irani, the then MD of Tata Steel—and wish to deeply acknowledge their contribution in shaping my ethics related business operations views. A person can peacefully progress only when there is support of his family. I am lucky to have such a family which supported and facilitated my pursuit of academic activities overlooking other responsibilities. Many thanks to all of them—my wife, sons, daughter-in-laws and the grandson. This book would not have been in present structure and style had not my elder son, Dhruva—a senior Business Manager in USA—been critical and constructive on the first cut of the book. His suggestions made me to rethink, change and remould the book in the present style. I acknowledge his valuable contribution. Finally, I wish to thank my grandson, Nikhil, who often asked me ‘why not I keep the book shorter’? The question kept ringing in my mind and reminded me all the time that as a speaker must know when to stop, a writer must know how to be concise. I don’t know if I have been able to be concise enough in discussing a subject which is extremely ‘view-centric’, but whatever has been accomplished I owe that to Nikhil’s question. Smarajit Kr Mandal

Brief Contents Preface to the Second Edition Preface to the First Edition Acknowledgments 1. Introduction to Ethics and its Applications in Business 2. Principles of Ethics

vii xi xv 1 58

3. Law, Ethics and Business


4. Ethics: Individuals and the Organisation


5. Ethics in Marketing and Consumer Protection


6. Professional Ethics


7. Ethics and the Environment


8. Ethical Issues of Some Contemporary Topics and Technological Developments


9. Corporate Governance: Principles and Practices


10. Corporate Governance: The Indian Scenario


11. Ethics and Corporate Governance


12. New Paradigms in Corporate Governance: Ethics, CSR and Sustainability






Contents Preface to the Second Edition Preface to the First Edition Acknowledgments Brief Contents 1. Introduction to Ethics and its Applications in Business 1.1 Concepts of Ethics, Morality and Moral Standards 4 1.2 Characteristics of Moral Standards 12 1.3 Moral Reasoning for Ethics 15 1.4 Moral Responsibility 21 1.5 Moral Standards vis-à-vis Ethical Standards 28 1.6 Ethical Decision-Making and Ethical Dilemmas 33 1.6.1 Ethical Dilemmas and their Resolutions 33 1.6.2 Ethical Decision-Making 37 1.7 How Ethics Work in Business 42 1.8 The Role and Scope of Ethics in Business 46 Summary 53 Key Words and Concepts 55 Exercises 55 Further/Suggested Reading 57 2. Principles of Ethics 2.1 Introduction to Ethical Principles 60 2.1.1 Moral Theories 63 2.2 Utilitarian Approach to Ethics 65 2.2.1 Rule-Utilitarian Approach 70 2.2.2 The Common Good Approach in Ethics 72 2.3 Rights and Duties 74 2.3.1 Rights 74 2.3.2 Duties 79

vii xi xv xvii 1



2.4 Ethical Rules for Contracts and Contractual Obligations 81 2.5 Justice, Fairness and Care 84 2.5.1 Justice 87 2.5.2 Justice of Fairness 91 2.5.3 The Ethics of Care 93 2.6 Judging Morality and Ethics 97 2.6.1 Ethics of Virtues 99 Summary 102 Key Words and Concepts 103 Exercises 103 Further/Suggested Reading 104 3. Law, Ethics and Business 3.1 Law and Ethics in Business 109 3.1.1 Employer–Employee Obligations for Ethics and Law 114 3.2 Ethics vis-à-vis Law 117 3.3 Business Philosophy, Systems and Ethics 123 3.4 Scope and Role of Business Ethics 127 3.5 Business System and its Environment vis-à-vis Ethics 133 3.5.1 Ethics in Business—Internal Environment 134 3.5.2 Ethics in Business—External Environment 139 3.6 Responsibility for Ethics in Business 144 3.7 Ethical Decision-Making in Business: Issues and Ways 148 Summary 152 Key Words and Concepts 153 Exercises 153 Further/Suggested Reading 154


4. Ethics: Individuals and the Organisation 4.1 Organisation and the Individuals 157 4.2 Rights and Obligations of Individuals in the Organisation 160 4.3 Organisation and the Responsibility for Ethics 165 4.4 Ethical Issues in Human Resource Management 170 4.5 Cases of Ethics Violation and Responsibility 175 Summary 183 Key Words and Concepts 184 Exercises 185 Further/Suggested Reading 186



5. Ethics in Marketing and Consumer Protection 5.1 Issues of Ethics in Marketing 190 5.2 Importance of Consumer Protection 193 5.3 Who are Consumers? What does Consumer Protection Mean? 195 5.4 Approaches to Consumer Protection 201 5.5 Marketing and Ethics 207 5.6 Ethics in Market Place Under Monopoly and Monopolistic Competition 213 5.7 Ethical Issues in Internet Marketing 217 Summary 221 Key Words and Concepts 222 Exercises 223 Further/Suggested Reading 224


6. Professional Ethics 6.1 Introduction to Professional Ethics 230 6.2 Ethics in Production and Product Management 232 6.3 Ethics of Marketing Professionals 235 6.4 Ethics in Human Resource Management 237 6.5 Ethics of Finance and Accounting Professionals 239 6.6 Ethics of Advertising 241 6.7 Ethics of Media Reporting 247 6.8 Ethics of Health Care Services 252 Summary 257 Key Words and Concepts 258 Exercises 258 Further/Suggested Reading 259


7. Ethics and the Environment 7.1 Introduction to Environmental Issues 265 7.2 Industry and Environment Pollution: A General View 268 7.3 Some Environmental Phenomena of Ethical Concern 273 7.4 Ethics of Controlling Environmental Pollution 281 7.5 Ethics of Ecological Protection 283 7.6 Rights, Duties and Care in Environment Protection 285 7.7 ‘Carbon Credit’—A Utilitarian Approach to Global Control of Greenhouse Emission 291



Summary 295 Key Words and Concepts 296 Exercises 297 Further/Suggested Reading 298 8. Ethical Issues of Some Contemporary Topics and Technological Developments 8.1 An Overview of Contemporary Ethical Issues 303 8.2 Computer and Information Ethics 309 8.3 Ethics of Genetically Engineered and Modified Products 314 8.4 Intellectual Property Rights (IPR) 318 8.5 Ethics of International Business and Trade in the Present-day Context 322 Summary 329 Key Words and Concepts 331 Exercises 331 Further/Suggested Reading 332 9. Corporate Governance: Principles and Practices 9.1 Corporate Governance: Role and Scope 337 9.2 Corporate Governance Principles and Structure 344 9.3 Codes and Standards of Corporate Governance 348 9.4 Models of Corporate Governance 356 9.5 Corporate Social Responsibility (CSR): The Social View of Governance 361 9.6 ‘Best Practices’ in Corporate Governance 365 Summary 369 Key Words and Concepts 371 Exercises 371 Further/Suggested Reading 372 10. Corporate Governance: The Indian Scenario 10.1 Emergence of Corporate Governance in India and the Landmarks 377 10.2 Corporate Governance Models, Codes and Status in India 384 10.3 Indian Corporate Governance—Roles and Responsibilities of Regulators and the Board of Directors 388 10.4 Corporate Governance: Some India-specific Issues 392 10.4.1 Corporate Governance Issues in Family-owned Business in India 395





10.5 Corporate Governance and the Indian Ethos 398 Summary 404 Key Words and Concepts 405 Exercises 406 Further/Suggested Reading 407 11. Ethics and Corporate Governance 11.1 Significance of Ethics in Corporate Governance 412 11.2 Ethical Dimensions of Corporate Governance 417 11.3 Ethical Approach to Corporate Governance 420 11.4 Improving Ethics in Corporate Governance 425 11.5 Managing Competition and Ethics 435 Summary 438 Key Words and Concepts 440 Exercises 440 Further/Suggested Reading 441 12. New Paradigms in Corporate Governance: Ethics, CSR and Sustainability 12.1 Setting Governance Platform: Ethics and Sustainability 447 12.2 Effective Corporate Governance: Regulation versus Self-regulation 452 12.3 Challenges to Corporate Governance: Corporate Social Responsibility (CSR) 456 12.4 Road Map for Excellence in Corporate Governance 460 Summary 465 Key Words and Concepts 467 Exercises 467 Further/Suggested Reading 468







CHAPTER 1 Introduction to Ethics and its Applications in Business

Ethics in Business and Corporate Governance

INTRODUCTION ance ern ce Gov ernan ate Gov nance por Cor orate over nce and Corp ate G erna s ov d nce or nes usi ess an Corp ate G erna B n por in Gov usi and ics B ness nd Cor orate Eth ics in usi orp sa Eth s in B usines and C ic s B Eth ics in usines Eth s in B ic Eth

1a, accessed on 30 September 2011, accessed on 29 September 2011 2a, accessed on 29 September 2011 2b, accessed on 29 September 2011 1b

Introduction to Ethics and its Applications in Business

Case I illustrates the moral values and principles one holds even in the face of the gravest threat to one’s own life; whereas Case II shows how individuals can flout the conscience of morality and moral responsibility, while handling a company’s affairs, endangering the life and safety of children for some personal gains. The question then is, why do people behave in such widely differing manners in social or business contexts? The answer: because of the sense of morality, moral standards and moral responsibility that each one believes in, and his or her acts and behaviour based on the same. This morality related act or behaviour of an individual is termed ethical or unethical depending on the moral reasoning and moral outcome of the act. Thus, the subject matter of ethics is the study of morality of one’s act and behaviour and its consequences. Ethics is a critical factor in promoting good moral behaviour and moral standards in a society for the sake of well-being and welfare of individuals in the society. On the other hand, it can also be said that ethics is a ‘moral filter’ for controlling the abetment and collusion of individuals to harm or damage the interests of the others in society – and, for that matter, in business organisations. Just as positivity of ethics can promote the well-being of a society or nation, similarly, the absence of ethics in society or business can cause immense harm and damage to the interests of a society and nation. The study of ethics is, therefore, an integral part of social and business development. The study of business ethics—also the subject of this book—involves understanding the system of moral standards and their applications in the conduct of ‘business processes’ through which modern society produces and distributes goods and services in a society and country. As ‘business processes’ are conducted through a set of organisation, system and people who are working for it, the study of business ethics applies to these systems and entities within the business organisation.Therefore, business ethics, concerning both application and outcome, cover a wide spectrum of topics and issues that are broadly grouped in business practices as: systemic, corporate and individual.While ethical issues relating to these groups vis-à-vis business ethics are discussed across the book, their understanding and interpretations call for a basic understanding of moral standards, moral reasoning and moral responsibility. Therefore, fundamental concepts and principles relating to morality and ethics will be discussed in this chapter. Here, the primary purpose is to introduce and examine the concept of ethics, morality and moral standards that go into investigating the ethical issues. Keeping in mind the end-purpose of this book, the concept and understanding of ethics and moral standards will be discussed and developed in the first few chapters—in terms of the main beneficiaries of business, i.e., individuals, corporate and the society. Ethical reasoning, which is the touchstone of any investigation about conformance to moral standards and moral responsibility, has also been addressed here to facilitate ethical analysis and the judgment thereto. Although the concept of ethics has been discussed by often referring to individuals, the primary aim of this chapter is to introduce ethical concepts that are relevant to resolving moral issues pertaining to business operations and to impart reasoning and analytical skills needed to apply ethical concepts to business decisions.Therefore, the conceptual relevance of ethics and ethical responsibility in business operations has been introduced only towards the end of this chapter.

Ethics in Business and Corporate Governance



The story of Socrates (refer to Case I) represents the epitome of ethics; it reflects the moral values and moral principles one holds in his or her conduct and behaviour. Ethics and ethical behaviour—reflecting moral principles and values—not only apply to personal lives but are also applicable equally in society and business. Ethics in personal life refer to the standards of conduct and behaviour of an individual with respect to his or her moral principles and values.The latter attributes guide us in choosing what is morally right and wrong under given circumstances (i.e. to pass or arrive at a moral judgment), and in taking appropriate decision and action based on our moral judgment—thereby making us feel satisfied or dissatisfied with our decisions, their actions and outcomes.We make this choice of decision on the basis of our moral understanding and feelings. If the choice is just and fair, we feel happy and satisfied or vice versa. In practice, as individuals, we feel, reason out and deliberate; and, based on these feelings and deliberations we decide and act in given situations. Thus, our acts or responses to a situation practically reflect our feelings, thinking and judgment based on our moral principles and values. This, therefore, brings out two things: (i) our acts and behaviour are reflection of our ethics; and (ii) our feelings of satisfaction and dissatisfaction or happiness and unhappiness are dependent on our moral judgment, which, in turn, is based on our moral principles and values. However, moral judgments, based on moral principles and values, may differ from one individual to another or from one situation to another. Therefore, our ethical behaviour or ethical response to a situation need not always follow a set pattern like a rule of law, as long as our actions do not cause harm to others in the society/community or lead to damage to the interests of others concerned. What matters most in our ethical behaviour is our feeling of satisfaction or dissatisfaction about the decisions we take during the course of dealing with situations and events in our lives. Let us illustrate this with reference to a sight that we frequently come across in many a city of India: begging on the roadside. Helping beggars is considered, by some, as detrimental to society; hence it is a controversial subject. Under this circumstance, take into account the contradictory behaviour of two persons—one, quietly passing by a beggar on the street without looking at him; the other pausing to give some money into the beggar’s outstretched hand. Both will have reasons to explain and justify their actions—based on respective moral principles and values—and may feel satisfied about the same. The reasons forwarded by each could be fair given the respective circumstance, and both may feel that they behaved morally or that they did not do anything morally wrong! Indeed, both would be correct in assuming that their chosen actions were satisfactory—provided they had acted in keeping with their moral principles and value systems, and had felt satisfied about the same.

It can therefore be said that ethics is about self-education and self-regulation—as to how to be guided in actions and decisions by some moral principles and values so that one is satisfied about his or her own action and its outcome. Ethics is a value-based approach to life, which is at the root of our satisfaction and success in life. Barack Obama, the 44th President of USA (United States of America), alarmed by the erosion of certain value systems from society and present turmoil in the business

Introduction to Ethics and its Applications in Business

world—largely due to the failure, of certain individuals running the business, to adhere to established values and moral principles, reminded the Americans in his first Presidential address (on 20 January, 2009): ‘...the values upon which our success depends—hard work and honesty, courage and fair play, tolerance and curiosity, loyalty and patriotism—these things are old, but these things are true. They have been the quiet force of progress throughout our history. What is demanded then is a return to these truths’. The cardinal principle of ethics is to respect the established moral principles and values in society so as to protect the interests of others. In our personal lives, this is reflected in our (ethical) conduct and behaviour; in business, it culminates in the attitude of trusteeship. Our actions and decisions must not unduly harm others or others’ interest (though our actions may not always further others’ interests), and must not be guided nor be motivated by greed, self-gain or self-interest. The ultimate aim of ethical behaviour and practice is to feel satisfied (and not necessarily justified) about one’s conduct and behaviour or action and its outcome. This is the characteristic of ethical behaviour. In this context, there is a fine distinction between satisfied and justified. Most people try to justify their action no matter what its outcome may be. However, if one cares to examine the outcome of that justified action, we may not always feel satisfied about it—not for the benefits of the result but for its consequences. Let us examine this through the case of begging discussed earlier. Consider that person who did not give any money to the beggar. He or she may have been justified in doing so, as it may have encouraged the beggar to continue begging (or there could have been some other morally justified reason). However, he or she may not have been aware of the consequences of his not helping the beggar with some money, which could have actually led to the beggar’s child starving at home. The beggar could have been a daily-wage worker who had lost his regular source of earning due to a strike at workplace or a calamity, and who had not managed to save for such contingencies given that he had to support a family of four (husband, wife and two children). It could be that neither the government nor any social organisation had undertaken a scheme to support such needy persons, due to which begging had been the only way out, for that moment, to feed the family. So, had the person concerned (who gave no money to the beggar) known this, he could have acted differently because of his values and moral principles. Thus, what could have made the difference between his or her justifying the action and feeling satisfied with its outcome is the knowledge about the possible consequences. The person may have acted differently had he or she known the consequences.

Thus, acting in keeping with one’s ethics also involves making an effort to know the possible consequences of one’s action and, then, to be sure that the action is to his or her satisfaction. There are numerous instances when we think that our actions have been justified, but that still leaves us unhappy. Our moral principles, in these cases, make us feel sad or dissatisfied about the result of our actions. Ethics is a system of moral principles and attitude that guides our actions to be morally correct, fair and just. Ethics are not simply professing about virtue or good behaviour; ethics are the expression and exhibition of standards of moral conducts governing the members of a profession,

Ethics in Business and Corporate Governance

business or society so that the interests of people involved in these organisations or associations are protected.This subject relates to the morality of our actions or specific moral choices that we make with regard to others in society or in business. Ethics are at the core of our behaviour and response to an event or situation, which makes us feel good or bad, satisfied or dissatisfied, happy or unhappy. And, in doing so, one has to be concerned not only with the action but also with the outcome of the action. Therefore, ethics and ethical issues are concerned with the morality and fairness of our decision and its consequences. This, in turn, is the manifestation of one’s character, his or her feelings, reasoning, morality, judgment and actions. It has long been established that there is a direct relationship between ethics and happiness. Not obeying the dictates of ethics (i.e. not behaving morally) leaves a person with the feeling of guilt. To quote Socrates, ‘vice harms doer’; the Greek philosopher observed that our vice harms us more than it hurts the one who is harmed by it.This is the stark reality, and it is this very belief that prompts humans in a society to think about ethics, ethical standard and morality of actions from very early stages of social development. Ethics and ethical standard of behaviour are essential for the stability, growth and harmony of and among the people in society, a business organisation or any other institution that serves the society. Ethics guide the society about acceptable principles of what is morally right and wrong, and aim to enforce the discipline of conformance to those principles (Figure 1.1).

The goal: Ethics Means: Morality Path: What is right, just, fair and virtuous?

Figure 1.1 Goal–Means–Path of Ethics

Ethics are a principled approach to life (in the case of individuals) and business (in the case of a group of people who run an enterprise). In this regard, a distinction should be made between ‘principles’ and ‘rules’. Stephen Covey, the famous expert on ‘Effectiveness Management’, has likened principles to the ‘lighthouse’ that guides a ship to move towards its destination. In the case of principles, one must follow the directions in order to safely reach one’s destination or even to stay on course. Rules, on the other hand, are specific in nature, and must be obeyed by acting as per the procedure laid down for the specific purpose. As such, most rules relate to

Introduction to Ethics and its Applications in Business

some laws or regulations. In terms of these features of principles and rules, ethics do not bind one with rigid rules of behaviour and action as has been illustrated in the example of begging. Ethics primarily aim to guide the behaviour and actions of a person or society or a business through adherence to certain moral principles, standards and values so that the others are not harmed by one’s unfair, immoral or unjust actions. The development of ethics in society and business stem from this basic approach of protecting the society and individuals (in a business) from being harmed by the action of others. It is more like ensuring that each one follows the right path and the right process for the right outcome; here, the word ‘right’ denotes what is ‘morally right’. If the process and its outcome are not morally right, the person or the body taking the decision is unlikely to feel satisfied and happy about the decision and action. Very often this criterion of ‘feeling satisfied and happy’ is used as a test for ethical conduct in a given situation. Thus, the purpose of ethical principles is to guide the individual, society or a business towards doing what is morally right for those who are (or could be) affected by a decision or action. Ethics is about enforceable morality, justice and fairness of conduct, actions and governance by individuals, institutions, companies, organisations, societies and governments. However, ethics are not the law unto itself nor are they instruments parallel to the laws of the land. Ethics make for a complementary logic that aids laws in balancing equity, fairness and justice in those matters of disputes and actions that touch or affect others. One should not confuse ethics with the laws; although complementary in their purpose, laws may prevail over ethics in the course of judgment. Aristotle promoted the legal philosophy of ‘virtue jurisprudence’ from its early stages of development, which takes the view that laws should promote the development of virtuous character (moral character) of citizens. Thus, morality and moral principles have long since been coupled with legal jurisprudence and interpretation. Similarly, ‘legal positivism’ —a part of legal jurisprudence and philosophy—argues that ‘what the law is is determined by social facts’, and ‘what obedience the law is owed is determined by moral considerations’. No legal positivist, therefore, argues that the law is to be obeyed, no matter what. This recognition of moral consideration and social facts in legal jurisprudence, and the argument against ‘no matter what, laws should be obeyed’, is the source and scope of ethics in combining its power of governance with law. Ethics and law, therefore, do not contradict each other; in fact, these two instruments of the society have always reinforced each other to uphold fairness and justice. (Chapter 3 will pursue this relationship between law and ethics). At times, what the law may permit us to do, ethics may not. Governing laws and laws of natural justice is directed to regulate our actions in accordance with certain established or standard practices.The aim of law and ethics may be similar (i.e., to minimise or prevent damage to others’ interests), but ethics will examine wider social issues involved with an action and may direct the individual or a company to act differently from what law would do in normal course. Ethics (and ethical approach) strike deep into the social, economic and environmental stability, development and growth of a society and the nation. Ethical considerations, along with legal provisions, act as the balancing ‘instrument’ for social justice, which are essential for sustained growth of a society. This point is further illustrated as follows:

Ethics in Business and Corporate Governance

Let us consider the case that stirred the Indian market in 2002–2003 when pesticides were found in the bottled soft drinks sold by a multinational company. This is an illustrative presentation of the case and not an exact representation of how the events occurred at that time. The following account is based on various media reports3a and b: Some objectionable levels of pesticides were found in some brands of soft drinks in India in 2002. These branded soft drinks were manufactured in India by a US-based multinational corporation, doing business all over the world. Coming from a multinational brand, the soft drinks were accepted by people in India as of the quality that would be on a par with the global standards of the company’s products and not harmful to human body, especially children. At that time, India had no stringent law limiting the pesticide residual levels in soft drinks that could harm the human body or could be beyond the safe level of tolerance. Following the startling findings of harmful pesticide residuals in soft drink samples taken from different parts of India, objections started pouring in from different quarters against the company’s soft drinks. The company was asked to withdraw such products from the Indian market. The Centre for Science and Environment Studies, New Delhi, tested similar samples from the products marketed by the companies in the USA and found them free from such pesticide residues3b. The company contested the findings and justified the marketing of its soft drinks by stating that the pesticide residuals were within the legal permissible limits applicable in India. It further argued that the problem originated from the quality of ground water that people in India were otherwise consuming freely. Hence, any harm done to people’s health due to its bottled drinks cannot be justified. Unconvinced by the company’s logic, a mass movement to stop the marketing of these soft drinks—in view of the health hazard it posed to consumers, especially children—began in the country. The matter moved from a consumer court to a higher court. But the judiciary could not stop the marketing of such products due to lack of clarity in the standards regarding allowable pesticide residues, and also owing to the controversy over the accurate determination of residual pesticides in water (on the part of test laboratories)’.

In these circumstances, there could be confusion about what should prevail upon the manufacturers of the bottled drinks: the law of the land or the ethics of protecting the health of consumers—even though there could be some doubt about the harmfulness of the product. Though the law could not prevent the sale due to lack of regulatory standards, should the ethics of business not have prevailed upon the manufacturer to either stop marketing its products or immediately correct the contents so as to render the drink less harmful? Would the manufacturer of the product not have gained by being ethical in practice—especially when an issue as important as the health of consumers was concerned? Most certainly; in the perspective of long-term business, the company would have gained a lot by complying with the ethical responsibility towards consumers, rather than by taking refuge in the ambiguity of law. In such 3a

Pesticide in Cold Drinks, 5 August, 2003:, accessed on 31 July 2009; and, accessed on 31 July 2009;, accessed on 31 July 2009 3b

Pesticide in Soft Drinks, Centre for Science and Environment, New Delhi,, accessed on 28 September 2011

Introduction to Ethics and its Applications in Business

situations, ethics examine the wider social issues and lead to some corrective actions that may satisfy (and not justify) all those concerned. Therefore, in this case, ethics of business does not approve the company’s conduct, even if it could be otherwise justified in the eyes of law. Morality and morality of actions are the yardsticks of ethics. Hence, the study of ethics is integrally related to the study of morality. But, it should be appreciated that although ethics deal with morality, they are not the same as morality, i.e., morality is not the whole of ethics. The study of ethics is involved with investigating and knowing if the outcome of an action has been morally right. Thus, ‘morality’ is the subject matter that ethics investigates through a process of moral reasoning. This means that, to determine whether a person has been ethical, his or her moral beliefs and moral standards have to be examined by moral reasoning—with reference to what is right and wrong, or good and evil in society or for business. The word ‘standard’ means that the view about what is ‘right and wrong’, etc. can be compared to an established norm, i.e., acceptable or unacceptable to the society. Moral standards include those norms that we believe are morally right or wrong as well as the value we place on subject matters that are morally good or bad. Let us illustrate this through the example of Sharia: As per Sharia, in the Islamic society, it is prohibited to accept interest accrued from money lent or deposited. As such, many are led by the moral principle that receiving interest would not be right on their part. An examination of this moral belief and moral argument may hold good in that society, to decide what is morally right or wrong. But, is the acceptance of interest from one’s own investments considered unethical by all? No; while it may be immoral for some people in a society, it will not be unethical for someone with different moral beliefs. The ‘ethicality’ of accepting interest off investment may be justified from the standpoint of an individual’s moral belief and moral reasoning. One may forward the moral reasoning that it is only logical that money be invested for economic growth of the country or society, and it is only fair that the investor or owner of that money gets his or her due share of profit (off the investment) in the form of interest. Therefore, there is nothing wrong or unethical about it as long as the profit from the investment has been earned by honest, legal and ethical means. Such investment and profit accrued by honest and ethical means is not harmful, if not beneficial, to others in the society. Hence, what may not be ‘moral’ in one society is not necessarily an immoral or unethical act in another society—if that can be established by proper moral (ethical) reasoning.4a and b

Very often morality and ethics are used interchangeably, despite having a very fine distinction as explained earlier. This is primarily because an individual is considered ethical if he or she upholds certain moral values and moral principles in his or her conduct or behaviour. Thus, morality and moral standards are the reflection of one’s ethical behaviour. Examples of moral standards are: belief in: ‘integrity is good and dishonesty is bad’, ‘always tell the truth’, ‘don’t intentionally harm others’, ‘think good to do good in life’, ‘it is wrong to spread rumours’, etc. 4a

Interest in Islamic Economics; Abdulkader S.Thomas (Ed.),Taylor & Francis, Oxford, 2005, ic+Sharia+Law+abd+Interest+earning&btnG=Google+Search&meta=&aq=f&oq, accessed on 31 July 2009 4b Interest in Islamic Economics—Understanding Riba; Abdulkader S. Thomas, Islamic_economics.html?id=ybnkig5ci6cC, accessed on 29 September 2011

Ethics in Business and Corporate Governance

Moral values include good or bad manners, honesty, respect for social norms, compassion for others, aesthetic sense by which we judge good or bad art and artistic creation, etc. One’s moral values and moral standards are the indicator of his or her ethics. However, moral standards are developed in a person with maturity (i.e. they may change with time). Therefore, one’s moral standards, which form a part of his or her ethical or non-ethical behaviour, can change with time and understanding. Since we are all social beings, society also expects us to behave by respecting its social and moral values. The morality and moral standards expected by society from its individuals also depends on his or her social position. Thus, expected moral standards vis-à-vis the society would depend on the social position one holds or the importance of the concerned issue in relation to morality. Again, we illustrate this point through the earlier example: In the case of pesticides found in bottled cold drinks marketed and produced by a wellknown multinational company in India, the company approached a celebrity to endorse its product—fearing loss of market-share due to such bad publicity and consumer apathy. For the same, the celebrity was apparently paid a huge sum of money. Now, the question is: ‘Would the celebrity, who accepted the deal to endorse the product as fit for consumption, be considered moral?’ The answer is: ‘No’; not if he or she chose to endorse the product only for money—without conducting any checks, and knowing that the product was held questionable for its harmful effects, especially on children. This is because, he or she did not follow the generally accepted moral standards of his or her position, which expect a celebrity to adhere to the morally accepted norms of behaviour: ‘it is wrong to mislead people’; ‘it is wrong to certify without further checks’; ‘it is wrong to exploit one’s privileged position’; ‘it is wrong not to tell the truth’; ‘it is wrong to wilfully neglect one’s moral responsibility’; etc. Since the celebrity, in this case, failed the test of morality, he or she is to be considered as unethical with respect to the endorsement.

In a way, moral behaviour is a process whose outcome or result determines ethics. If the outcome is right for the society, not harmful to others, and not for personal gain overlooking social interests, the behaviour or action will be regarded as ethical. If the behaviour (moral standard) exhibited by an individual result into right, just and fair outcome, that behaviour would be considered moral. Moral standards expect a person to uphold his or her morality by demonstrating his or her moral principles and by adhering to values such as honesty, truthfulness, integrity, trustworthiness, etc. Ethics expect a person to uphold certain moral principles and values that are regarded as absolute and necessary to live and let others live in society without any harm or detriment. Thus, morality is an essential ingredient of ethics, but it alone does not quite equate to ethics all the time because ethics is also outcome dependent, and the morality of a judgment may at times be limited to a specific situation without having regard to wider social implications. To illustrate this point, consider the following example:

Introduction to Ethics and its Applications in Business

“The Government of West Bengal, a State in India, acquired a huge track of fertile agricultural land at Singur, near Kolkata, for Tata Motors to set up a green-field small-car factory. The proposed industry with potential to generate large-scale employment was welcomed by people in general. But the acquisition of fertile agricultural land for the factory faced stiff resistance from the landowners and cultivators who had been earning their livelihood from this land for generations. Most of them strongly protested the government move to acquire their land. Ultimately, the government had to use force to occupy the Singur land, fence it and hand it over to Tata Motors. The forcible occupation of the land by the government provoked intense protests not only from the land losers but also from social activists, interest groups and some political parties. The movement against the Singur land acquisition got intensified with time and finally forced Tata Motors to withdraw from the project after two years of working5a”. Soon, the Singur case became a turning point for the land movements in India and a large number of people affected or going to be affected by such acts of land acquisition raised their voices and protested at different forums. Social activists, politicians, philosophers and lawyers got into discussions and debates about the legality and ethicality of this action. From the ethics point of view, here this question arises: Is the forcible land acquisition morally justifiable in India? The land acquisition may be justified by provisions of existing laws and also by the moral argument that it would benefit a large number of people by generating employment opportunities. Yet, one may argue the ethicality of non-voluntary acquisition of such fertile agricultural land, considering the loss and damage it caused to the interests of helpless farmers of that locality, who know no other means of livelihood except traditional farming. Depriving them of farming would also lead to uprooting them from the society and social environment where they have lived for generations. A one-time financial compensation for the acquired land will not see them through the future as they are not trained to invest or engage commercially. The Singur case poses a very pertinent question: Even if a project offers opportunity for employment and wealth generation for the nation, can the well-being and future of large numbers of agricultural people be sacrificed? Here the moral issue is the farmers’ uncertain future in an industrial society. In reality, the farmers are ill-equipped to survive in this society. In this case, ethics will guide to ascertain whether the long-term well-being and continuation of livelihood of the farmers have been taken care of by the sops that accompany land acquisition. The non-voluntary acquisition of land—without guaranteeing long-term well-being and continuation of the same livelihood of the affected farmers—may not allow the land acquirer (the doer) feel good and be satisfied with the outcome of the acquisition act. Hence, such an act may not pass the test of ethicality in view of its wider social implications. (This need to follow ethics in land acquisition has been vindicated by the fact that the Government of India in September, 2011 introduced a new bill in the Parliament for land acquisition and rehabilitation where long-term financial and social view of the deal has been proposed.)5b

5a, accessed on 29 September 2011, accessed on 29 September 2011


Ethics in Business and Corporate Governance



A person develops moral standards from his or her very childhood. A child absorbs and develops the morality from all sources that he or she comes across, such as: family, friends, society, media, magazines, school or even some specific situations. As the child grows and starts encountering more external sources, he or she starts exhibiting certain moral standards. These standards are further modified as the child grows up, starts experiencing the real world, and learns new things, develops intellectual capability, and matures to take his or her own decisions. Through this process of maturity, persons learn and develop moral standards to deal with the external world and dilemmas of adult life. It is expected that we live by these moral standards that we develop and hold. If the standard matches that what is generally believed to be morally right and morally good in the society we live, the person is called moral. The moral standards may, however, continue to change and develop as we mature, grow further, learn afresh or as social and environmental changes take place. Thus, moral standards of a person reflect his or her attitude and orientations with which he or she grows, thinks, feels, behaves, reasons, judges and acts in life. These moral standards are based on good and beneficial reasoning, and not on authority or command. Thus, the moral standards one follows have to stand the test of good reasoning—and not the subjective opinion of a superior or a command from an authority. In contrast to this, laws are concerned with what is legally right or wrong e.g. obeying the instructions of superiors in office, not violating the official code of conduct, not driving a car without a licence, etc. Laws and rules are framed in consideration of the rightness or wrongness of acts, and compliance to the same is commanded by a position or authority. Many a time, especially in business transactions, one may face the conflict between legal and moral righteousness. For instance, let us consider the following example: Consider the case when an employee seeks ‘leave of absence’ for a medical emergency (a close family member undergoing an operation), even when he is not entitled to immediate leave. If the boss does not sanction the leave, he is legally right—yet, he would be considered morally wrong. This is because moral standards are based on good reasoning and not on authority. Here, the reason for seeking urgent leave from work stands the test of good reason and moral justification. Similarly, selling a product (say, a refrigerator) to a customer at a discount store after customer’s inspection and satisfaction is legally right—yet, if that product does not function, as specified by the seller, on installation and if the manufacturer or the seller (store owner) does not take responsibility for malfunctioning, then that would be immoral. The seller may take the legal stand that it is the buyer’s responsibility to inspect and be satisfied before purchasing the goods under the legal dictum of ‘buyer to beware’ (i.e., the buyer has to be aware of buying a product at his or her own risk), but it would be morally wrong for the seller or manufacturer not to rectify or change or service that refrigerator, leaving the customer helpless. (Fortunately, in the latter case, most manufacturers or sellers do not invoke the ‘sale of goods’ act and try to resolve the complaint through warranty services.)

At times, one may act strictly as per the law or direction of an authority (e.g., owner of the shop in the example cited earlier, or the head of a company, etc.) following one’s own understanding of the situation, and thereby choosing non-moral standards over moral standards.

Introduction to Ethics and its Applications in Business

Such action will not be morally acceptable under the cover that the law permits it or that it conforms to the service condition of ‘obey the orders of superior’. To make people morally conscious of their actions and help them to understand what is the required moral standard, ethicists have suggested few characteristics that distinguish moral standards from that of other standards not exactly related to moral standards, and called non-moral standards. These nonmoral standards are in vogue in society, at work or in business and often influence the behaviour of an individual. Examples of such significant but non-moral standards are reflected in: etiquette in the society, behaviour with superiors in the workplace, service to customers, individual behaviour in a community, etc. These non-moral standards are generally guided by laws, regulations, procedures, systems or conventions.They are important indicators of a person’s ethical standards, but cannot be equated to ‘moral standards’. For instance, we apply our judgment in response to different situations in our daily lives all the time. These judgments are generally based on our moral values and moral reasoning, and influence our behaviour. For example, we often make judgments about right and wrong, or good and bad, and say: ‘This is right’; ‘He is wrong’; ‘The manager should not have punished him’; or ‘It is a good omen’; etc. Accordingly, we take our stand vis-à-vis the issue or the situation. These judgments, that lead us to take positions, are based on some kind of standards in the society, community or business, and get built into us based on, or influenced by, some conventions, systems or established norms in society. But, they are not moral standards—because, moral standards must be based on and established by good and logical reasoning, and must not be dependent on a convention, regulation or norm. To live up to moral standards, we must consciously learn to think about, deliberate on and reason out the actions and their outcomes so that the latter does not harm others and is just and fair. Therefore, an understanding of the characteristics of moral standards is necessary for us to think correctly, deliberate and reason (Figure 1.2).

Moral standards :

• Deal with subject matters of social, political, economic importance, irrespective of implications–good or bad

Moral standards :

• Based on impartial considerations • Not guided by self-interests

Moral standards :

• Self-regulating • Self-inflicting

Figure 1.2 Characteristics of Moral Standards

Ethics in Business and Corporate Governance

Characteristics of moral standards 1. Moral standards deal with subject matters that have serious implications in society, environment and workplace, irrespective of whether the implications are beneficial or harmful. For example, pesticide content in cold drinks is serious enough to harm the health of consumers and children and, hence, it is a moral matter. 2. Moral standards are self-regulatory, i.e., they cannot be changed by the laws and regulations of bodies including the Government. In other words, moral standards cannot be enforced by an authority or a superior.Validity of moral standards rests on the good reasoning. So long as the reasons are good and adequate and the outcome of action does not unfairly damage the interests of others, the stand remains valid. For example, even if India had a governing standard for cold drinks and the pesticide content met the permissible standards (of the law, that is), moral standards dictate that if the level of pesticide is bad for health, the manufacturer must correct it and stop marketing the product till it makes the correct or new formulation. 3. Moral standards are not guided by the self-interest or other non-moral standards and values. Those who uphold their moral standards do not hesitate to sacrifice their self-interests and other non-moral values. For example, the celebrity promoting the cold drinks, with questionable pesticide content, should not be guided by the self-interest of receiving a hefty consideration for his or her endorsement. Such a lure and trap of self-interest will be construed as being immoral or as violating moral standards. 4. Moral standards are based on impartial considerations. This implies that one cannot take a moral stand if there is no impartiality in the decisions and reasoning, i.e., the stand should not advance the interest of a particular individual or group. For example, in the pesticide in cold drink case, if the party who first brought out the report has done so to safeguard the interest of a competitor, then it violates the moral standards. Moral standard demands that the press or the person who reported the matter must have done that on impartial consideration. 5. Moral standards are self-inflicting, i.e., if one fails to stand up to moral standards, he or she feels bad, guilty of failure, or becomes remorseful. Such examples are many amongst people who, after taking a stand, feel remorseful for being unable to uphold the moral standards. For example, the celebrity who had endorsed the cold drink with objectionable level of pesticide against payment might have felt guilty about not acting as per the moral standards that the society expected of him or her. In some critical ways, such unethical behaviour weakens the personality due to this sense of guilt. Interestingly, the characteristic of moral standards – that a stand or action should not advance the interest of a particular individual or group—may sometimes be questioned under a specific business situation. Let us review this point with the following example: A family owned business appoints the Promoter’s young son as the Director, superseding many Senior Executives. Though such situations are often accepted without question, this may appear as a violation of moral standards due to partiality. Questions may arise about

Introduction to Ethics and its Applications in Business

how to deal with such a situation from the moral standpoint. Moral standards demand impartiality but, in this case, the special position and relationship of the person being benefited may call for a balanced approach in the context of safeguarding the interest of the owner and his stake in the family business, provided he holds the overwhelming majority stake and such an action does not harm the interests of other stakeholders. From this standpoint, the decision—if taken with the consent of other members of the board—may be justified as protecting majority interests, and the preferential treatment of an individual may be legitimatised in this condition. But, ethics demand that such decision should be consistent with the purpose of the business, must not impair the interests of other stakeholders, and should not harm the present benefits of the superseded persons. More about such situations will be dealt with later in this book.

In summary, moral standards have certain characteristics. They deal with matters that have serious implications for the society and human beings, and are evaluated based on good reasoning and not on authority or regulations. Judging moral standards must overlook self-interest, and should be based on impartial considerations. Typically, violation of moral standards is associated with a self-inflicted feeling of badness and guilt. Upholding moral standards in our acts and deeds has, therefore, become the primary pointer towards ethics be it for happiness in personal life or success in business. The study of ethics attempts to determine whether a stand taken by an individual or a group (on behalf of an organisation) stands the test of moral standards or provides fairness of actions based on that stand. The primary moral standards for judging ethics are: theories of utility, justice, rights, and care. Business ethics in this book will base its discussions on these standpoints.

1.3 MORAL REASONING FOR ETHICS It is quite evident from the foregoing discussions that deciding what is ethically right or wrong will depend on the ability of individuals to reason out what is fair and morally right. Our sense of judging what is moral, or the development of our moral understanding, grows with our maturity. What is moral at one stage of our life may not be so at another, because of the change in our understanding of the needs of oneself, the society, family, the surroundings, human rights, the nation, the institution we work for, and also owing to further development of our sense of logic and reasoning to identify what is rational and universal. According to the famous psychologist Lawrence Kohlberg6, there are three levels of our development of moral understanding starting from childhood to maturity, which can be further divided into two steps each, as follows: Level – I: Childhood Stages 1. Punishment and obedience orientation as a child where physical consequences of an act wholly determine the goodness or badness of an act.

6, accessed on 30 October 2009

Ethics in Business and Corporate Governance

2. Instrument and relativity orientation when right actions become those that can serve as instruments to satisfy the child’s own needs or needs of those for whom the child has concern and care, e.g., parent, friends, etc. Level – II: Conventional Stages 3. Interpersonal concordance orientation where good behaviour is living up to the expectations of those for whom one feels loyalty, affection and trust. Here, the right action is what is expected of an individual by the family, friends, teachers, society, etc. 4. Law and order orientation where the sense of right or wrong comes from loyalty to the conventions of the society in particular and the laws of the nation at large. Level – III: Principled Stages 5. Social contract orientation when the person becomes aware that people hold variety of conflicting personal views and opinions, and the fair way to reach an agreement, contract and path, or the process of doing so, is by consensus after reasoning. The person comes to believe that all norms are relative, and that they should be tolerated (or adjusted with) as far as possible. 6. Universal ethical principles orientation where right actions come to be defined in terms of moral principles which are chosen because of their logical comprehensiveness, universality and consistency. These ethical (or moral) principles are not rigid like laws or religious commandments; they are flexible, abstract principles dealing with: justice, social welfare, equality of human rights, respect for the dignity of individual human beings, and rights to fundamental necessity to live and protect lives. At this stage, a person’s reasons for doing what is right are based on his or her understanding of these moral principles. Kohlberg’s study implied that people’s skill of moral reasoning is better at later stages of maturity because people gradually develop the ability to see things from a wider perspective, and have better ways to justify their decisions to others. At this mature stage, people can justify their deeds on the basis of moral principles that are relatively impartial and reasonable. It is not that all people ultimately reach the stage of maturity in moral understanding; some people may remain at the childhood stages or in the conventional stages. However, as people grow and interact with each other, they develop firmer and more mature moral perspectives, and thereby improve their moral reasoning skills. That is why, moral reasoning may vary from person to person though all the people may belong to the upper age group. Moral reasoning tries to logically place or project facts and figures (or evidence and information) that help one to judge human behaviour, institutional activities, policies, programmes, etc. as to whether they are in accordance to, or in violation of, acceptable moral standards. In order to judge this, there have to be two components of reasoning: (1) An understanding of what ‘acceptable moral standards’ means, i.e., what exactly the standards require, prohibit, condemn or value with regard to the specific situation; and (2) Evidence or information which shows that persons, policies or behaviour have the kind of features that these moral standards require, prohibit, condemn or value.

Introduction to Ethics and its Applications in Business Arriving at a moral judgment Examination of facts vis-a-vis situation Identifying moral standards

Moral reasoning

Figure 1.3 Foundation of Moral Judgment

To better understand these components of moral reasoning, let us consider an earlier example: If we apply the steps of moral reasoning to the case of pesticides in cold drinks, the case has to be examined for moral reasoning with regards to: 1. The maximum tolerable limit of pesticide residue in cold drinks that would not affect the health of a child who would generally consume plenty of this drink: this would help in understanding what the ‘acceptable moral standard’ permits, requires or prohibits; and 2. Evidence of pesticide residue higher than what can be tolerated in the bottled cold drink, determined on the basis of statistical samples taken from different batches of production and analysed in a well-equipped laboratory: this is to examine if the company’s behaviour has the features that do not comply with the moral standards required for this specific purpose. It is only after examining the issue with regard to these two steps that one may be able to judge if any violation of moral responsibility has occurred, and if the company is not conforming to ethical principles of business.

Thus, moral or ethical reasoning has three distinct features in its process: (i) identifying what constitutes ‘moral standards’; (ii) examining facts and figures concerning the policy, behaviour and actions under the specific situation; and (iii) arriving at a moral judgment on the basis of rightness or wrongness of policy, behaviour or actions (Figure 1.3). In this context, it is to be noted that the purpose of ethical reasoning discussed here is to lead to a moral judgment, i.e., if the actions are morally right irrespective of the legal standing.

Ethics in Business and Corporate Governance

Let us further examine the complexity of moral judgment in a case where the direction of morality differs from that of legality. Industries in India often employ temporary workers for jobs that, in many cases, run throughout the year. As per law of the land (i.e. India), employing contract labour for more than eleven months at a stretch is not legal. [ref. The Contract Labour (Regulation & Abolition) Act, 1970]. Therefore, industries resort to laying off the concerned labour force for about a month and re-appointing the same under contract again for the next eleven months. This saves the company from the commitment to provide certain benefits that go with the permanent employment. Though the law also states that if the job is perennial in nature, the workforce has to be made permanent. Under the condition of supply of labour in excess of demand, all concerned are willing to accept this practice, because at least this system facilitates some employment for some people for some period in a society where unemployment is widespread. They argue that something is better than nothing, and accept the temporary employment system under the legal framework. Let us now consider that the concerned labour union raised objection to this practice stating that the jobs are perennial in nature, and gave the company notice for a strike. In turn, the company explained that though the jobs concerned are perennial in nature, it is uncertain about the future demand (market conditions) and does not want to hold an extra inventory of production. As such, the sustainability of jobs is doubtful, and it cannot make the temporary workers permanent in such uncertain conditions. Therefore, the company cannot afford to make a commitment to continue employment at this stage. It further explained that if the labour union pressed the issue any further the company would altogether be forced to stop taking temporary contract employees. It would get the jobs, associated with temporary workers, done by the existing permanent workforce working overtime. Understanding the present situation and its possible fallouts, a group of contract labourers insisted on continuing with the present system of employing temporary contract labour for the jobs, and supported the company. This move upset the union, and it suspended those members. Now, under the circumstances, is the union ethically correct to disown that particular group? Is the company ethically correct in continuing with the contract labour system for jobs that are actually perennial in nature, and when law does not quite permit the same?

To find the answers, we examine the issues vis-à-vis the three features of the moral reasoning process: (i) What should constitute ‘moral standard’ by which the actions and results will be measured or compared? (ii) Is the unemployment situation really calling for some special behaviour and actions on the part of the management and the union? (iii) How can we arrive at a moral judgment regarding the rightness or wrongness of the company, as well as of the union? These questions could be answered by both ‘yes and no’, but the idea of moral reasoning is that one should be able to morally justify his or her actions or choices under a given situation so that the decision is based on some rational and logical thinking, and does not harm the others concerned. These are the principles to approach the purpose of ethical (or moral) reasoning. If the law had been the sole guiding factor, the answer would simply be ‘no’ in this case (to continue with the employment of contract labourers in jobs that are actually perennial in nature). But, considering the likely damage to the interests of labourers due to loss of opportunity of employment (though

Introduction to Ethics and its Applications in Business

partial), and following the logic of moral or ethical reasoning and its three distinct features, one may ethically judge that: (a) The company may be allowed to continue the practice for a while till the market stabilises to a degree of certainty; and (b) The labour union is ethically wrong to disown the group, or force stoppage of the employment opportunity, without creating alternatives. What moral reasoning is basically pursuing in this case is: Are we choosing the alternative that provides greater good to a greater number of people in the society in a specific situation? Thus, the guiding principles for moral reasoning to find out if moral standards are being followed can be summarised as: To take a mature and wider perspective view of the situation or circumstances under which an action is being called for. Examine if the action is leading to benefits of wider section of the people in the society or more number of people involved in the process. To consider, feel and deliberate on the needs for justice, social welfare, equality of human rights, respect for the dignity of individual human beings, rights to fundamental necessity for living and protection of lives, and other such human, social and environmental factors. To understand and define the ‘acceptable moral standards’ with regard to what the standards require, prohibit, condemn or value in the given situation. To unearth or identify factual evidences and information showing that the person or the policy or the behaviour—either of a person or a company—has the kind of features that the moral standards do or do not require, prohibit, condemn or value. To arrive at a moral judgment through logical and consistent reasoning on the rightness or wrongness of the policy, behaviour or actions, irrespective of the legality and based on aforesaid factors. There is no doubt that moral reasoning is not a simple, straightforward analysis of factual information for decision-making. It requires sensitivity towards various human and social issues involved, clear and unbiased mind, and understanding of: (a) expectations of the society or benefactors or the aggrieved persons; (b) restrictions of the law, environment and codes of conduct in an organisation or society; and (c) any other factors that may limit the scope of moral judgment. Moral reasoning must be logical, evidences must be accurate, relevant and complete, and the moral stand taken should be consistent with both the past and the present. Identifying moral standards from the standpoint of factual information through ethical reasoning is a complex task, but it must be diligently carried out to stop the damage to society or business due to unethical behaviour of individuals, or the actions, policies and programmes of a company with regard to its stakeholders and the society. Many a time, individuals (working in an individual capacity or for and on behalf of the organisation) genuinely believe that what they are doing is unbiased and morally justified because that is the best solution in view of the organisation’s interests, but they fail to see the expectations of the society or the aggrieved persons, or fail to play a fair role. To illustrate this view, consider the following profile of a hypothetical case:

Ethics in Business and Corporate Governance

A company advertised for a position stipulating certain academic qualification and job experience. About 470 applications reached the office within the prescribed period. On scrutiny, 278 candidates were found fulfilling the qualification and experience requirements. On further analysis, it was noted that 163 candidates were female and the rest (115) were male. The company decided to call 100 candidates for the interview; 50 each of both genders. Having interviewed them, the company then selected 25 candidates—15 female and 10 male. When the list of selected candidates went to the ‘boss’ for the final approval, he asked whether so many female candidates would befit the job specification that called for shift duty—including night-shift. Hence, the list was revised and 20 male and 5 female candidates were finally offered appointments. It must be noted, in this context, that the law of the land prescribes equal opportunity in jobs for both genders, and that the company also claimed to be an ‘equal opportunity’ organisation.

An analysis of information and facts in the aforesaid case show that: It is the ‘boss’—an individual—who has acted in a partisan manner, on behalf of the organisation. The reason for the boss’s decision is the special circumstances of night shift where females may feel insecure, but it is without enough investigation to unearth the facts about it. The company’s decision not to offer jobs to the original number of qualified female candidates (15)—without discussing with them if they have any genuine problem not to work the night-shift—is unfair and unjust. The company has failed to uphold the spirit of the law of equal opportunity. Therefore, the conclusion would be that the company had not acted fairly and in keeping with the demands of ‘moral standards’. To morally justify the actions, the reasoning of the company must be logical and fair; evidences of female candidates being unsuitable to work in the night-shift must be accurate, relevant and complete; and the moral stand taken should be consistent with the past and present. If the company can justify its action through moral reasoning for the latter enquiries, then its action can be considered ethical in this case. However, it may not always be possible to separate the intricacies of logic and reasoning from the judgmental approach to moral standards.This is because of the difficulty to completely take away the human touch from the process of reasoning. Nonetheless, attempts should be made to identify all moral issues and standards pertaining to actions of importance and substance by gathering factual information and relying purely on ethical reasoning. Individuals in a business should leave no opportunity, as far as possible, to act unfairly and unethically under the cover of ambiguity of moral issues and standards. Damage due to unfair and unethical behaviour of individuals in business may reach out to a company’s policies and programmes, leading to widespread damage to the interests of its stakeholders. The collapse of large corporate likes the Enron and World Com in USA7, and Global Trust Bank and Satyam Computers in India8, is all due to the unethical and immoral conduct of few individuals in these companies. 7, accessed on 30 September 2011

8, accessed on 30 September 2011

Introduction to Ethics and its Applications in Business

Therefore, to decide if an action or policy is ethical, one has to exercise moral reasoning by examining the factual information with regard to morality of the action or policy by analysing: (a) the utility of the decision, rights and duties of the individuals concerned with the decision; (b) if justice is being meted out by the decision; (c) the amount of care being shown to those who are related and valued in the subject matter; and (d) the consistency of the decision with the past and present. Any shortcoming in any of these norms for ethical behaviour would render the decision or action either non-ethical or suspect depending on the gravity—or the impact—of the situation. For example, in the case of land acquisition for industry, the decision of the authority may be right from the viewpoint of utility and justice being meted out in the form of financial compensation, but considering the consequences of social and economic impact of displacement on the people, it would be unethical if the decision is not justified as per the norms of protecting their legitimate rights and showing special care to the concerned (affected) persons by some concrete action that would benefit them more in future than the loss they would suffer in the present. In cases of such a profile, all the conditions mentioned earlier in this section would have to be satisfied for the deal to be treated as ethical; otherwise, the deal will be treated as unethical or an ethical suspect.

1.4 MORAL RESPONSIBILITY Deciding what is the appropriate moral standard and who is morally responsible for upholding that standard is a part and parcel of ethical reasoning, and deciding ethical correctness of a behaviour or action. However, it must be appreciated that moral standard is one thing, and imposing moral responsibility is another thing altogether.The word ‘responsibility’ means being legally or ethically accountable for the welfare or care of another. Psychologically, it is the sense of responsibility that makes one careful and deliberative regarding any act and actions. Therefore, the study of ethics may sometime involve reasoning to judge if one has been morally responsible for any act injurious to others. Thus, ‘moral responsibility’ would mean owning responsibility for doing something knowingly and deliberately that had caused harm or injury to others. An individual or a company has the moral responsibility not to act wrongfully so that it does not violates the acceptable moral standards and cause harm, loss or injury to others —either to an individual, group, society or a company or its stakeholders. Examples of such acts are: a company deliberately employing child labour; not paying the minimum wages to a contract labour; practicing discrimination of pay for similar jobs; allowing free emission of harmful particulates in air; discharge of industrial effluents without proper neutralising treatment; negligence towards environment protection and regulatory compliance; etc. Any person or a company wilfully indulging in such activities will be morally responsible for the violation and damage caused by such actions—some of which may even attract legal repercussions. The purpose of establishing moral responsibility through moral reasoning is to judge the extent to which a person committing wrong deserves punishment or blame or penalty. Thus, establishing moral responsibility has the connotation of law or rules, in addition to its ethical implications.

Ethics in Business and Corporate Governance

Examples of wrongful or injurious acts cited earlier must have one thing in common: that is, did the person commit wrong or harm knowingly, without understanding what is right or ethical under the circumstances? There are instances of a person or a group doing things without knowing or wilfully, but by chance or coincidence. Let us consider the following hypothetical cases in a business scenario: Selling an established product (say, air conditioner) that caused injury to the member of a household due to an electrical short circuit and fire thereof. Here, the seller did not know if the product had any defect that led to the failure, because it is not new and has, in the past, satisfactorily served customers without any such problem. It is also presumed that the product was brought to the shop after quality tests and with an ‘OK’ permit. Hence, the salesman did not know if such a problem could arise nor did he anticipate anything like it. Therefore, in such cases, the seller may feel bad or sad because of the buyer’s suffering, but he is not morally responsible for the injury as long as he did not knowingly sell a defective product. But, if it is established during a subsequent enquiry that the quality control personnel had failed to detect the fault, due to negligence, then he or she and the company could be held morally responsible for the injury. This goes to establish that a person is morally responsible for those acts and their anticipated harmful or injurious consequences which he or she knowingly and deliberately perform or fail to perform in order to prevent harm caused to others. Here, the person concerned for quality check is morally responsible because he or she is paid by his employer to do so correctly. Another case, contrary to the former, comprises driving a car without a valid licence and meeting with an accident causing injury to a pedestrian. Here, the driver knew that driving the car without a licence—which is the legal testimony of minimum required driving skill—is illegal and morally wrong. Hence, he cannot deny moral responsibility for the accident and the consequent injury to the pedestrian. He is liable for punishment and monetary compensation even if the insurer of the car refuses to extend any. In such cases, morality and legality will work conjointly.

Then there are instances when people commit a wrong or fail to prevent a wrongdoing by omission despite having knowledge about the consequences of the act. In such cases, the person concerned is also held morally responsible for the injury or harm. Illustrated here is one such case: Daily Mail of the UK published a news item titled: Patients Leaving Hospitals ‘with surgical instruments inside them’, reported by Daniel Martin on 08 April, 20079. Some relevant parts of the report are reproduced below: The report states: ‘Two patients a week are leaving hospital with surgical instruments still inside them, it was revealed yesterday’. The report further goes on to say: ‘The list of lost implements includes swabs, a catheter, a metal clip and a contraceptive coil, according to data obtained under the Freedom of Information Act. . . . There were a total of 283 claims 9, accessed on 30 September 2011

Introduction to Ethics and its Applications in Business

against the NHS in the last three years—nearly two every week. And that figure is likely to be just the tip of the iceberg as there could be hundreds of other people who will never find out about their doctor’s mishap.’ The report also states: ‘Over the last three years, the Health Service has paid £4.3 million over a series of claims by patients that doctors have left foreign bodies under their skin.’ Here, the doctor/surgeon knew of the consequences of the effect of leaving a surgical instrument inside the body and was duty-bound to ensure that the cut-opened portion of the body is thoroughly cleaned and checked before it is stitched close. Despite such knowledge, they failed to prevent the incidents (damages) either by omission or by negligence. But, whatever could be the cause, such doctors/surgeons will be held morally responsible for the damages—as has been borne out by the admission of claims (to the tune of £4.3 million pounds) from aggrieved patients by the NHS (National Health Services) of the UK), who in these cases have acted as the ‘principal’ of their ‘agents’, the Doctors.

However, if any one under the circumstances acted out of (a) ignorance or (b) inability, he or she may be excused of moral responsibility. Because, under the conditions, that person was not in a position to either know the consequences or control the event, i.e., what he or she did was not knowingly and freely done. Reasoning to affix moral responsibility must establish whether the wrongdoing was wilful or due to ignorance. In this context, it is important to clearly understand when ignorance and inability absolve a person of his or her moral responsibility. The following is an instance in that regard: Take the case of silicosis, a disease rampant among workers engaged in crushers of mica mines or stone quarries all over the world.10 Here, the mine-owners cannot seek the excuse of ignorance about the effect of siliceous dust in such working conditions. Yet the owner often claims inability to prevent the wrongdoing saying that the miners refuse to wear protective appliances, thus rendering the results beyond his control. In such circumstances, the test of moral reasoning should first establish: if the owner has the right type and quality of protective appliances; if those appliances are suitable to wear and work with; if he insists that the workers wear the same and if there is an established mechanism to check and control violations thereof; if he has communicated to and counselled the workers about the ill-effect of not using the protective gear; if he has instituted periodic medical check-ups for the workers to make them aware of their health and the necessity of using the appliances, etc. Observations regarding these aspects must be logically analysed and only then should any inference be drawn about the owner’s inability or moral responsibility. If the owner deliberately wants or tries to keep himself unable to perform, then that inability cannot be accepted as a reason for failure to hold moral responsibility. Similarly, one cannot deliberately stay ignorant and claim innocence for a wrongdoing —be it as a person or company. For example, if a company discharges untreated industrial effluents containing poisonous chemicals in an open canal, and if some cattle accidentally


A study conducted by the World Health Organisation (WHO):, accessed on 02 August 2009

Ethics in Business and Corporate Governance

drink that polluted water and die, then the company cannot plead ignorance about the possibility of cattle drinking that water or its dangerous consequences. Similarly, if a patient is discharged by a hospital (or a doctor) after being treated for a serious chest infection —but before the complete treatment and cure—due to paucity of hospital beds, then that hospital or doctor is morally responsible for any complication in the patient’s condition that arises due to incomplete treatment. Neither can plead ignorance about the possibility of complication due to the incomplete treatment and the consequences of any infection. [To avoid legal responsibility of such consequences, hospitals often ensure that the patients or their representatives sign the declaration that the patient is being discharged from the hospital on his or her own accord. Despite such a declaration, the hospital cannot deny moral responsibility for any harm to the patient or his family.]

More than as an individual, in business operations it is important for the management (an individual owner or the group of people who manages the business) to make reasonable efforts to know the consequences of any acts or deeds, and to take adequate steps to be informed, equipped and act so that wrongdoings can be prevented in time—before any damage has occurred. Let us refer to the tainted milk scandal in China cited earlier in this chapter: It was reported that the contaminated milk caused the death of six children, and nearly 300,000 children fell sick after drinking milk that was intentionally laced with melamine, a toxic industrial compound that can give a fake positive on protein tests. Officials of the Sanlu Group were aware of the same, but did not make it public, nor warned the consuming public, nor recalled their product in time to prevent the damage. It was a case of serious food safety failure due to gross, moral negligence of company officials. A Chinese court sentenced two men to death and the General Manager of the company to life imprisonment. The company has since gone bankrupt due to this unethical scandal. (see footnote 2).

The case was judged as one of the worst ethical failures in China, especially in the safety sensitive field of food-processing. The law took serious note of the intention of the company and its officials to take recourse to mixing a toxic in children’s food with a view to profit from the protein tests. The people directly involved were held morally responsible and guilty for the death and suffering of children. Even the General Manager could not escape the responsibility as the Head of the Establishment that failed to check and prevent this serious failure, which was his or her job. The court found that persons who were responsible for preventing such food safety failures were directly involved with propagating the crime. Hence, the court took very serious note of their acts while awarding punishment. The Sanlu case was not as a result of ignorance or accident; it was deliberate and intentional failure on the part of the company to prevent damages by not only acting unethically and immorally but also not waking up to the call of moral duty (by warning the consuming public and recalling the product from the market). Such gross moral violation and the resulting scandal invited the most severe reactions from the public, the government and the law-enforcing authority, leading to severe punishment of responsible officials and the closure of business at Sanlu.

Introduction to Ethics and its Applications in Business

This kind of ethical misconduct is also frequently observed among individuals in society, and not necessarily owing to ignorance but due to disrespect towards moral standards and a lack of any sense of moral duty and responsibility. For example, consider the case of death of an infant baby—as reported in a local daily—due to a public nuisance that we often come across in Indian cities. A car driver was continuously honking loudly near a children’s hospital in the dead of the night, despite numerous signboards displaying ‘Hospital’ and requesting not to blow the horn. Due to this shrill and loud noise from the car, one child patient—critically ill—started crying loudly, got choked in the process and died before any emergency treatment could be extended at that time of the night. Under such circumstances, would the driver of the car be held morally responsible for the death of the child? Ignorance cannot be an excuse for such violation of rules (signboards reading ‘Hospital’ and ‘Silence Zone’ were prominently displayed in the area) and, thereby, showing no respect for moral standards and obligation under ‘moral responsibility’. Moral standards are not about the effect of one’s act and deeds on the self only; they are more about the effect of one’s acts and deeds on the health, hygiene, safety and well-being of others. Therefore, the principles to establish moral responsibility are: 1. Ignorance of fact or consequences. This principle is based on the fact that one can live up to moral obligations if one is aware of the facts and consequences, and has control over such happenings, which may not be possible if one is ignorant. In such cases of ignorance, one cannot have any moral obligations, and the moral responsibility for the causes of such actions is absent or minimal. For example, the refrigerator which harmed the buyer (due to short circuit) was caused by a fault unknown to the seller, who had sold the product in good faith presuming that it was sound. Hence, the seller was neither in a position to have control over the fault—and the consequent damage or injury—nor in a position to foresee the same. Therefore, he or she can claim ignorance and be relieved of any moral responsibility. 2. Ignorance of moral standards. This principle considers that ignorance about some moral standards may stand in the way of taking moral responsibility. For example, take the case of a person smoking in a non-smoking zone—he does not know the rule nor can he read English (the language on the signboard that reads ‘Non-Smoking’). Here, he may plead ignorance of the rule and his inability to adhere to the required moral standard, and ask to be excused from the moral responsibility that may have harmed public health. Similarly, a tourist may tip a service provider in a foreign country—not knowing it is tantamount to bribery and violation of moral standards in that country. Such genuine cases of ignorance will not stand the test of moral responsibility. Ignorance is generally connected to inability to comprehend or ascertain or understand. This inability can be due to internal or external circumstances. A person may lack the knowledge, ability and/ or skill to act in accordance with moral obligations. For instance, a tourist cannot comprehend signboards (written in the local language of that foreign country) and ignorantly trespasses onto a forbidden zone; or, a villager visiting a metropolis for the first time fails to adhere to some civic code of moral standards there. Here, it is a genuine case of ignorance that prevented each from acting responsibly; had it not been for ignorance, he or she could have acted with moral responsibility. On the other hand, a physically-challenged person who was unable to save help

Ethics in Business and Corporate Governance

someone from drowning in a swimming pool may not have done so due to ignorance or lack of moral standards or obligations, but due to sheer inability (or powerlessness born of his physical inability to dive/swim) to prevent the bad incident. Here, the inability is not due to ignorance but due to lack of power. At times, lack of power also prevents people from acting morally and being responsible for moral obligations. For example, in business, it is not uncommon to find an employee, under pressure from higher authority, forced to do an unethical task. Can the Supervisor prevent the use of poor quality material in the construction of a building if the Chief Engineer recommends the same and enforces his instructions? The resulting structure may endanger the lives of many and the Supervisor may have the full knowledge and understanding of the wrongness and immorality of such practices; yet, he cannot prevent it from happening due to lack of power. As long as the Supervisor does not willingly and actively participate and perpetuate the wrongdoing or action, he cannot be judged morally responsible for the consequences of the act. However, it is expected from a person who is in the know of an act and its consequences, to make some kind of moral protest against such wrongdoing. Hence, though the Supervisor may not exactly be held morally responsible for the wrongdoing, he will feel sad for being unable to stop an unethical act.This situation will be further qualified and clarified in the following passage. Uncertainty, difficulty, and involvement are other factors that play important roles in determining the violation of moral standards and fixing moral responsibility. These factors may mitigate the moral responsibility to a certain extent, but will not totally exonerate the person. For example, a passenger at the airport is requested by a stranger to carry a parcel to a metro destination he is flying to, and that, on reaching the destination, he will have it collected by someone. The stranger may describe the urgency of the parcel reaching on time, e.g., a document required for a court-hearing held that very afternoon; or a specific medicine for a patient critical in that city, etc. Based on his judgment, the passenger may refuse or accept to deliver the parcel to the requested destination. Here, he may be uncertain about the moral standard expected of him or its consequences, but not altogether unsure of them or the risk involved. In such a case, if he ‘accepts’ the parcel and anything untoward—known or unknown—happens as a consequence of the parcel reaching the destination (e.g., terror attack, illegal transfer of money for criminal activity, etc.), he will be morally responsible. But, the degree of moral responsibility will be somewhat mitigated due to his uncertainty. Similarly, it may be difficult for a clerk in an office not to approve a false claim (bill) if he is instructed to do so by the ‘Boss’. Yet, it is not totally impossible for him to ignore the order, because there are rules and regulations in the company that allow for such wrongdoing to be notified to an even higher authority or to an audit committee. If the clerk, under pressure, does obey the Boss’s instruction and passes the false bill, his moral responsibility with regard to the act can be partly mitigated but not totally excused. Likewise, a person may not be fully or actively involved in a wrong act or wrongdoing that happened under a special circumstance. For example, a thief snatches a gold chain from a passerby and sells it to a goldsmith on the pretext of contingency. Taking advantage of the situation, the goldsmith buys the chain at a nominal price. Subsequently, the police get a tip from an informer, and raid the goldsmith’s shop to recover the chain. The latter pleads that he bought the chain not knowing that it was a stolen item. But, his partial involvement in the cycle of events is proven

Introduction to Ethics and its Applications in Business

by the fact that he paid less than the market value only by suspecting something fishy about the sale. In such circumstances, his moral responsibility for a series of wrong acts—stealing and selling a gold chain—cannot be totally excused, though it may stand mitigated. However, the other side of a similar example, where no such mitigation is allowed, can be illustrated through the role of an auditor who was hired by a company to check for any fraud in the accounting process. But the auditor compromised the situation and chose to be silent about that matter and certified the accounts. When the fraud was ultimately exposed, the auditor pleaded that he was not actively involved and, hence, was not responsible for the act. Here, he cannot escape his share of moral responsibility for his failure—intentional or not—to report the matter in time. Because, one cannot escape moral responsibility for a wrongdoing if preventing the unethical act was the specific duty of that individual; in this case, the auditor. However, the foregoing conditions of minimal or not-active involvement will not apply if the wrongdoing is of a serious nature as are the consequences to society, e.g., terrorism, murder, rape, drug trafficking, etc. as shown in the flow chart depicting moral judgment (refer to Figure 1.4). Action / Decision / Policy under scrutiny Understand Moral Standards of the place, society and business 1. Apply Moral Reasoning

as to (1) Understanding of 'acceptable moral standards', i.e., what exactly the standards require, prohibit, condemn or value with regard to the specific situation, and (2) Evidence or information that shows that the person, policies or behaviour has the kind of features that these moral standards require, prohibit, condemn or value.

2. Establish Moral

by: applying the principles of ignorance of fact or consequences; ignorance of moral standard; uncertainty, difficulty and involvement.

Responsibility 3. Apply Moral Judgment

on the rightness or wrongness of action, policy or behaviour.

Figure 1.4 A Tentative Flow Sheet for Ethical Judgment

To summarise, an individual is morally responsible for any injurious effect he or she has caused to others or to the society by knowingly and freely committing a wrong or failing to prevent a wrongdoing either by omission or commission. But, moral responsibility for such a wrongdoing is completely excused if the wrong has been committed by genuine ignorance, inability or insanity. There are occasions when a wrong could have been done under the condition of uncertainty or difficulty or minimal involvement. At such times, moral responsibility for the wrongdoing gets mitigated as long as the injury or effect of the wrongdoing is not serious enough for the society, or preventing the wrongdoing was not a part of the specific duty of the individual concerned. However, many ethicists feel that passively allowing something wrong to happen and causing the wrong to happen is no different. Therefore, one’s moral responsibility cannot be mitigated even though the individual might not have actively taken part in doing the wrong and causing the injury. Thus, there could be many views about moral standards and moral

Ethics in Business and Corporate Governance

responsibility, but they all have the ultimate aim of making a person conscious and responsible for behaving morally and ethically in the society or in business, so that damages to the interests of others concerned are minimised or eliminated. In the governance and administration of a society or a business, following minimum acceptable moral standards and ethical behaviour is absolutely necessary for the sake of prosperity of and peace in the society and growth and sustainability of the business. In our domain of social and professional behaviour, these moral and ethical imperatives are expressed in terms of ‘moral standards’ and ‘ethical standards’, which are though used interchangeably but do not necessarily mean the same. Hence, the next section will deliberate on this topic to understand their respective roles and implications.



It may be appropriate at this stage to have clarity about the ethics and moral standards and their respective roles in governing the behaviour of individuals and the business. The question is: do the ethics and moral standards mean same thing? Discussions so far have highlighted the Moral standards are not absolute. They may change with society, place, and circumstance or even with the maturity of the person. Morality is not simply the rules or standards that people accept or follow. Moral standards have to be rationally justifiable standards of behaviour for a society. Morality is not private nor secret and nor esoteric. In order to expect people to be moral, morality should be seen as something open, acceptable and accessible to all people—at least to those who are sensible and mature enough to be held responsible for their actions. Moral standards are based on impartial considerations without any self-interest or bias. Their objective is to further the cause of rightness and goodness of a society or a group. Moral standards are self-regulating and self-inflicting.They cannot, and need not, be enforced by superiors or outsiders.They are based on good and value-based reasoning. If one fails to come up with good reasoning for one’s actions and decisions, one would feel bad, dissatisfied and even guilty. Ethics, on the other hand, mean the logical study of morality of an action by searching the principles that nullify the action or justify it as fair and good. For example, if a nursing home fails to admit a road accident victim for want of ‘medical insurance coverage’, it would be termed unethical according to ‘medical ethics’. The reason is medical ethics prescribe certain ‘ethical standards’ to be maintained and upheld in the conduct and practices of medical profession. Refusing to admit or to extend urgent treatment to a helpless road accident victim is against the ethical standards of the medical profession. The society by and large views ethical standards as enforceable when they pertain to the behaviour of a body of people, profession, business, association and institution. In each case, the respective ethical standards are based on the principles of ‘moral reasoning’, the perception of ‘moral responsibility’, and the application of ‘moral judgment’. Hence, ethical standards can be described as a ‘product of the minds of people’ who frame the standards, for example, ethical standards set by the leaders of organisations for their business operations.Thus, ethics and ethical

Introduction to Ethics and its Applications in Business

standards of actions and decisions can influence the course of a business in a manner that could be beneficial or harmful to different stakeholders of the business and the society it serves. Therefore, for all practical purposes relating to business, morality and moral standards would refer to ‘individuals’ and ‘people’ —be they a part of business or an independent entity — as regards goodness, rightness or fairness of their actions and decisions. On the other hand, ethics and ethical standards would apply to business, institutions, associations and professions as regards the conduct, actions, decisions, behaviour and policy of the organisation or individuals running the organisation. Ethical standards of working at these places and businesses are meant to build ‘trust’ and ‘belief ’ among different stakeholders, members, associates and the society by adhering to some discrete characteristics that include: Honesty Integrity Values

Transparency Accountability Respectfulness

Humanity Legality Commitment

The distinction between morality and ethics often gets blurred because these terms are often used interchangeably and can mean the same thing in casual discussions. But morality refers to adhering to certain moral standards or conduct of behaviour by people or individuals—taught or established in a society as part of natural feature of reality for good, harmonious and fair living. Ethics or ethicality of actions and decisions, on the other hand, would refer to the degree of goodness, rightness and fairness of such standards and conduct (i.e. morality) exhibited by an organisation or individuals running the organisation. Morality is more individual and more universal than ethics. Ethics evolve from the sense of morality, and morality, in turn, is based on values and sense of fairness and justice in each individual’s environment. Ethics in business seek to instal a fair, just and caring organisational environment by promoting ‘ethical standards’ of thinking, behaviour, actions, policies and decisions thereby cementing the purpose and process of business with focus on each stakeholder’s interests, including customers, consumers and the society (Figure 1.5).






Figure 1.5 Characteristics of Ethics





Ethics in Business and Corporate Governance

Another characteristic of ethics is consistency. Many moralists have argued that if people consistently treat all human beings the same way, they will always act ethically. Ethical behaviour, they argue, is simply a matter of being consistent by extending to all persons the same respect and consideration that we claim for ourselves. To imply that ethics consist of nothing more than consistency, they refer to these words from ‘The Bible’: “Do unto others as you would have them do unto you: this is the whole Law and the prophets.” (Matt. 7:12). This is, perhaps, not exactly ethics, but the principle of applying ethical rules. If it is so, then while applying this aspect of ethics to set ethical standards, it would be necessary to ask: Can ethics be made universal? The obvious answer is not because ethics are applicable in the environment of each individual, and that cannot be universal. Therefore, what it means to be consistent is to apply the ‘moral reasoning’—leading to ethicality of an action—of one situation to another the same way unless we can show that the two situations differ materially and hence not suitable for consistent application of ‘moral reasoning’. Some may tend to pose the dilemma over morality and ethics distinction as the ‘chicken and egg story’ —seeking to debate which one came first! No doubt, it is difficult to disentangle the two terms—morality and ethics—from each other completely, but that is not necessary either. Because these two terms are part of the same system, and the system is not complete without either of them. This system is the system of defining goodness and rightness for the society at large by taking recourse to ‘morality’, and fairness, justice and care for individuals living in the society (or partnering an activity) by taking recourse to ‘ethics’. In fact, there are three distinct standards that should guide, shape and control our behaviour in the society or in our activity, such as business. These standards are described below: 1. Moral standards: These are common rules for everybody in a society. These are necessary for making the society a harmonious place for everybody to live, enjoy and prosper, prohibiting wrongdoing by following moral values and virtues. 2. Ethical standards: These are rules of behaviour established through ‘moral reasoning’ and exhibited by the culture, custom, thinking, actions and decisions of a society to demonstrate its adherence to a certain degree of fairness, justice and care. 3. Legal standards: These are systems of punishment and incentives in a society or country for enforcing laws and regulations, representing the minimum that the society will tolerate for peaceful living. An individual’s or an organisation’s behaviour below the legal standards will supposedly harm the society. Therefore, the wrongdoer will be punishable under the law. When one examines the spirit of these standards, it is observed that (a) ethical standards are the offshoot and extension of moral standards, and (b) ethical standards are the ‘social extension of legal standards’ because the society or community is not content with the ‘minimum tolerable’ limits that laws set. In other words, the society or community sets the ethical standards to reach out to grey areas of legal standards, or outside the legal standards, to protect the larger interest of people or to cover larger number of people. Often this results in exceeding the ‘minimum tolerable limit’ of behavioural standards set by the legal systems.

Introduction to Ethics and its Applications in Business

For example, consider the case of the detection of pesticide residual in the bottled soft drink, which could not be acted upon by the legal standards due to the absence of an ‘Indian specification’ limiting the maximum presence of certain harmful residuals in soft drinks. Hence in this case, ethical standards—constraining a party from harming the health of children— could be invoked to stop the marketing of such supposedly harmful products. Similarly, many environmental issues—like vehicle pollution in a metropolis—can be addressed by invoking ethical standards concerning the right of an individual to clean air if the pollution control laws are weak. In such cases, application of ethical standards to the issue can help protect the larger interest or the interests of large numbers.

Thus, the study of ethics or ethical standards involves understanding the issues of morality in a society, judging an action by unbiased moral reasoning, and setting acceptable standards of actions and behaviour that may even go beyond the boundaries of minimum tolerable limits of legal standards. A good system of law may incorporate many ethical standards, but the law can also deviate from what is ethical, as exemplified by the case of pesticide-laced soft drinks in India. Another aspect of law is that it is framed by an authority, and if that authority is not moral or ethical (e.g., a dictatorial or totalitarian regime) then the law can become ethically corrupt, functioning as instrument of power alone and designed to serve the interests of a narrow group. Hence, for a balanced judgment and governance, we require both legal standards and ethical standards. In fact, in a democratic set-up, law and ethics often complement each other in an attempt to ensure justice, fairness and morality of decisions or actions by individuals, governments and corporates to promote harmony in the society and fairness in governance.

For example, the move by the Government of India in September 2011 to enact a new law through the ‘Land Acquisition and Rehabilitation and Resettlement Bill’ to replace the old and archaic 1894 Land Acquisition Act is a testimony of combining the law and the spirit of ethics in the purpose and process of land acquisitions for public and private uses.11 Seemingly, the aim of this new act concerning land acquisition, resettlement and rehabilitation is to do justice to the fair and ethical demands of the farmers for their long-term well-being and their right to continuation of livelihood of similar quality, if not better, after the loss of agricultural lands.

There are innumerable instances in this world to show that without ethical standards of behaviour, the society will crumble and become unmanageable for harmonious living, productive work, equitable utilisation of resources and cooperative welfare. Despite such importance of ethical standards in our life, it is often felt that identifying ethical standards—that we should follow in a given situation and environment—is difficult because of somewhat abstract nature of morality and ethics. Moral philosophers have suggested five approaches to ethical standards that can be examined to arrive at what is ethical. These approaches are explained below:

11, accessed on 17 September 2011

Ethics in Business and Corporate Governance

1. The Utilitarian Approach As per the utilitarian approach, ethical action is the one that provides the maximum good or does minimum harm. This means that the ethical action produces the greatest good and does the least harm to all those who are affected by it or its outcome, such as a community, users of the environment, and customers, employees and shareholders of a company. Ideally, the utilitarian approach should try both to increase the good done and to reduce the harm done. If the action passes the test of utilitarianism, it can be said to be ethical or conforming to ethical standards. 2. The Rights Approach Ethicists also suggest that the ethical action is the one that best protects and respects the moral rights of those affected. In this regard, it is noted that every living being has certain ‘moral rights’, for example, the opportunity to live, the right to privacy, the right to justice, not to be harmed, choice of actions, as long as the actions are not harmful or injurious to others in the society. The rights approach to ethics, by implication, also assumes that everybody has the duty to respect others’ rights. If an action violates any such rights, it can be construed as unethical. 3. The Fairness or Justice Approach This approach originated from the preachings of ancient Greek philosophers, like Aristotle, that all equals should be treated equally. So strong was the dictum of this concept that many of our judicial systems had subsequently developed on this concept and called for equality of all human beings in the eyes of law. Any departure from this principle has to be supported or justified as ‘fair’ by ‘logically defensible standard of behaviour or action’. For example, persons guilty of similar crime have to be treated equally for punishment, whether one is a common man and the other is a man of high position in the society. Similarly, by fair play, a well-skilled person could be paid higher wages compared to a person of lower skill or education, and that would not be discrimination. 4. The Virtue Approach Virtues are dispositions and habits of individuals that show considerations for wellbeing of humanity, adherence to certain well-meaning values like the truthfulness, honesty, integrity, generosity, fairness, prudence and self-regulation.The virtue approach to judging ethics demands consistency of actions in conformity with these virtuous dispositions.The virtue ethics ask for examining one’s actions by oneself to judge whether the actions are consistent with one’s best beliefs, honesty, fairness and integrity. 5. The Common Good Approach This approach suggests examining an issue with attention to welfare of everyone in the society. The spirit of this approach is that everyone in the society is locked in a ‘do good’ relationship and all should respect this approach while taking or deciding any action. This approach to ethics calls for showing compassion for wellness of all, especially the vulnerable ones in the society, for example, children, the poor and the sick. The purpose of common good approach is to spread the reach of ‘benefits’ to as many as

Introduction to Ethics and its Applications in Business

possible in the society. Many ethics-based actions in the society and business are based on this approach of common good; for example, the work of charitable trusts, blood donation camps run by clubs, and the corporate social responsibility (CSR) activities of companies and businesses. It is not that an action or decision has to fulfil the criteria of all these approaches simultaneously to be judged as ethical or of good ethical standards. But, no doubt, these examinations will lead to something of a decision about which one could feel good and satisfied. These constitute a test of moral reasoning that we use for ethics. More about ethical decision-making will be discussed later.

1.6 ETHICAL DECISION-MAKING AND ETHICAL DILEMMAS Ethics touch our social and work life in more than one way. We feel happy, satisfied, motivated and fulfilled when we are treated ethically, but unhappy, frustrated and broken down when treated otherwise. Ethics bind a society or a group together with the spirit of ‘do good’ to our life and means of living. Ethics are necessary not only in our personal life but more so in our work-life, profession and business where we work in a group or a team for the purpose of serving a cause of our profession or a duty of our business, and we are responsible for our actions, decisions and their effects. The impact of our decisions on our personal or professional life can be far reaching, either good or bad, depending on the ethicality of our decisions. Hence, discussions are necessary to establish the ways and means of making good ethical decisions under different personal and working situations. Making good ethical decisions requires sensitivity to ethical issues, an introspective mind and attitude of being fair, just and caring.The process of ethical decision-making may take different routes, but it should have clear focus of ‘doing good to others’ and must not be masked by selfinterest, bias or prejudices. More we place ourselves into others’ shoes (i.e., in the place of the people to be affected by the decision), better would be our decision. Many experts believe that ethical decision-making should be done by examining an issue with respect to five principles of ethics, namely the utilitarian principles, the principles of rights and duties, the principle of justice, the ethics of virtue and care, and the principle of common good. Still, many feel that ethical decision-making is difficult because of the ‘ethical dilemmas’. Ethical dilemmas posing contradictions between moral perceptions and imperatives do come up at times in our personal and professional life. Therefore, resolving ethical dilemmas, if any, is essential for taking an acceptable ethical decision by all means. Hence, before proceeding to ethical decision-making steps, we will discuss aspects of ethical dilemmas and their resolutions.


Ethical Dilemmas and their Resolutions

Ethical dilemmas are a self-inflicted situation that arises due to various contradictions between one’s moral perceptions and imperatives, conflicts of ideologies between people, differences in value systems, diversity of culture, and skill of moral reasoning of an individual, putting the ethical principles at risk. An ethical dilemma puts the decision-maker into a conflicting situation that might jeopardise the quality of ethical decision, not because of failing to choose between ‘right and wrong’, but between

Ethics in Business and Corporate Governance

the ‘right and right’! We do experience in business processes and executions some situations in which our professional responsibilities come into conflict with our values—getting us caught in a ‘grey area’, and no matter which option we choose, we are left with a feeling of shortcoming. As per a Boeing (of USA) slogan: “Between right and wrong is a troublesome grey area”. Hence, a part of ethical decision-making system must also include the process of resolving the ethical dilemmas, if any, that cause ‘conflicts and contradictions’ in the decision system. Some typical sources of ethical dilemmas are listed below: 1. Conflict of personal and professional values 2. One’s values and moral principles versus the perceived role of a task 3. Conflicting ethical values between ‘taker and giver’ of a service 4. Choice between two actions having equally favourable or unfavourable elements in a decision 5. Choice between two unsatisfactory alternatives as a solution of a problem 6. Conflict between an action its consequence Let us understand few of these dilemmas through examples from different professions and functions of business.

1. A marketing executive is approached by a wholesale consumer to provide ‘cut-back’ money on the purchases he will make for continuation of an order of supplies.The executive is under pressure to complete his annual sales target and checks up that this order is vital for his meeting the sales target. This has put the marketing man into an ethical dilemma of: ‘Should he sacrifice his personal interest to protect his professional integrity of not striking any underhand dealing?’ 2. A project manager was faced with the challenge of ‘time over-run’ and consequent cost escalation for failing to get the ‘environment clearance certificate’ from the concerned agency. He had the option of bribing his way through to get the certificate without following any mandatory conditions or to develop a new water body and planting ten thousand trees on its banks. The former choice would be against his values and principles, whereas the latter choice would require more time and money for completion of the project.This had put him into an ethical dilemma arising from the conflict between his moral conscience and the sense of responsibility as project manager. 3. A newly established private educational institution for vocational courses proposed to air a 10-second advertisement at the peak time on a popular TV channel in a metro claiming: ‘Enrolment in the Institution automatically guarantees 100% jobs in Government offices’. The proposal had put the accounts manager of the TV channel into a dilemma whether to accept the advertisement—accepting the advertisement would mean supporting and promoting ‘wrong’ information, and refusing the same would mean loss of revenues to the

Introduction to Ethics and its Applications in Business

channel. The TV channel was more concerned with the consequences of their action that might mislead many poor students to pay hefty fees to enroll in the course with job false guarantee. 4.The mother of a brain-dead boy requests the head of the hospital where the boy is admitted after an accident to withdraw the life support from the patient and allow him to die in natural course. The reason is keeping the boy alive for long will cost enormous amount of expenses that his family cannot bear. Besides, keeping the boy alive in the brain-dead condition is also worthless. The dilemma before the hospital is which alternative to choose, as both are not only equally bad and pathetic but also against the professional ethics and law. If the hospital chooses to continue with the life support to the boy, can they force the mother to pay for the treatment meted out purely on humanitarian ground and without her consent? These are few examples of ethical dilemmas and questions they raise. Fortunately, we do not always face such dilemmas in our business or professional work, but we do face them nonetheless. Hence, a formal method of ethical decision-making should consider the ways and means of resolving the ethical dilemmas satisfactorily to the extent possible. Resolution of an ethical dilemma could not be a fixed line of ‘right or wrong’ approach except that one should be on the right side of the law if there is any law concerning or prohibiting the action involved in the ethical dilemma.This is not to say that it is always morally wrong to break law. Here the purpose is to emphasise that the legality or legal provision has to be taken into account while resolving a dilemma. For example, withdrawing the life support from the brain-dead boy will tantamount to allowing ‘euthanasia’ that is not legally permitted in India. But morally, it could be justified and supported by many. Resolving an ethical dilemma to the satisfaction of all concerned is a difficult task. The most practical approach would be to do something that makes you feel good and satisfied from the standpoint of your moral reasoning. This might include the circumstances and environment leading to the ‘issue’ that poses the dilemma and actions on that issue. There are two major approaches that philosophers use in handling ethical dilemmas. One focuses on the practical consequences of what we do, and the other focuses on the actions themselves and weighs the rightness of the action alone. It is often argued in the realm of ethics that ‘if there is no harm, there is no foul’. Hence, the consequence of a decision is important.The other approach claims that some actions are simply wrong in the eyes of ethics, hence cannot be desirable as a solution. Therefore, it is up to one’s moral belief and standards to choose any action as a solution to one’s dilemma.

Common Analytical Steps in Resolving Ethical Dilemmas • Step 1: Identify the moral issues involved in the ethical dilemma and list out where they are conflicting with the values, norms, equality, systems, laws, professional codes, responsibilities, conscience and virtues. • Step 2: Analyse the consequences of the issues regarding “who will be benefitted and who will be hurt; and what will be the benefits or what would be

Ethics in Business and Corporate Governance

the harms?” For example, who are to be benefitted may include individuals, society, employees, shareholders and locality. And, the possible benefits could be cleaner environment, better safety, better health, better work environment, compliance to rules and regulations, sustainability and good living. Examine these benefits and harms for long term or short term to arrive at a better judgment of the decision. • Step 3: Examine options for various alternative actions from different perspectives, but without considering the consequences of those options on any one. Examine each option with respect to how it measures up against moral principles like honesty, fairness, equality, respecting the dignity of others and rights of people. Whether there is a conflict between the principles or between the rights of different people involved? Is there a situation where one principle is seemingly more important than the others? Next, identify which options would offer actions that are less problematic for you in your own situation and context. Then shortlist a few options (as few as possible) that stand out better than the rest. • Step 4: Examine the options in the light of the ‘principles of ethics’, especially the utilitarian principle and the principle of common good, to find out further moral merits of the decisions. • Step 5: Make the final decision by taking into account the direction of approaches mentioned earlier, that is, (a) the consequence of the decision, and (b) the rightness of the decision. Identify which one will make you feel more good than the other if there is still conflict between the choices and then take the call. While dealing with ethical dilemmas, remember that you cannot resolve all dilemmas to the satisfaction of all parties or address all aspects of the issue involved. Sometimes you may have to choose the best among the worse. The idea is you should feel good and satisfied for having taken that decision under the given circumstances and environment you are placed into. At times, you (or a business enterprise or a government) may have to seek ways and means to mitigate the harm or loss to the involved parties arising from an ethical dilemma. For example, let us refer back to the case of land acquisition for industries in the country (discussed in Section 1.1). The issue gave rise to conflicts that pitted the law vs ethics, the interest of the nation versus displaced farmers, compensation versus sustenance, and rights (of farmers) versus force (of the state). Ethical considerations arising from adverse consequences of land acquisition on the farmers prohibit the forcible land acquisition (though that might be legal as per law).

Introduction to Ethics and its Applications in Business

Such an issue often poses an ethical dilemma to social scientists as to what to follow— consequences of the act or rightness of the act as per legal provisions and practices. The state can neither ignore the underlying ethical issues that go against the current laws nor can it be an idle onlooker to the problems of industrialisation of the country. Hence, the Government of India had to ultimately devise ways to mitigate the sufferings and losses of farmers due to loss of land. The proposed Land Acquisition and Rehabilitation Bill, 2011 (referred earlier) is proposing rehabilitation and guaranteed employment to each land losers for ensuring longterm sustenance and prosperity. The solution to the problem, in this case, has been possible not by sticking to the law of the land or by going against it due to ethical imperatives, but by resolving the issues of dilemma by checks and balances that would do good to both the interests.


Ethical Decision-Making

Any rational decision-making process should have at least five steps: (1) Clear perception of the problem, (2) Analysis of the problem, (3) Developing different alternative solutions, (4) Analysing alternative solutions for choosing the best, and (5) Implementation, control and monitoring for results. Ethical decision-making should not be an exception to this process route. But this process becomes somewhat more difficult and special for ethical decision-making, as it involves ensuring morality and ethicality of the prospective solution. Ethical decision-making requires sensitivity to ethical issues, an introspective mind and an attitude of being fair, just and caring for those whom the decision will affect. Experts recommend that ethical decision-making should be done by examining the five principles of ethics, which are: the utilitarian principles, the principles of rights and duties, the principle of justice, the ethics of virtue and care, and the principle of common good. Experts believe that the ethical decision-making should be done by examining an issue with respect to five principles of ethics, namely the utilitarian principles, the principles of rights and duties, the principle of justice, the ethics of virtue and care, and the principle of common good. If an issue poses any ethical dilemma, the decision-making process should more or less follow the steps described earlier. Fortunately, not all issues and decisions concerning ethics are entangled in conflicts or enmeshed in dilemma situations. Nonetheless, ethical decision-making is an important subject that impacts the way we live in the society, do business in the market, treat our customers and consumers, protect the environment, care about children and conduct our professions. Ethical decisions are the index of our ethical standards, moral values, social virtues and attitude towards good and harmonious living. We need to have a trained sensitivity and disciplined approach to ethical issues and a standardised approach for exploring ethical aspects of a decision to be able to make an ‘informed choice’ for an action that meets the acceptable ethical standards. Hence, having a separate method for ethical decisionmaking is necessary and helpful. Good ethical decision-making requires a careful exploration and analysis of the problem by understanding the perspective of others, being fair and moral, impartial and caring, and having an uncorruptible bent of mind for doing good to others. Ethics is a process of mind

Ethics in Business and Corporate Governance

that is selfless, virtuous and benevolent. Making a good ethical decision is easier for a good and transparent mind. A recommended method of ethical decision-making, adopted from the research work at the Mark Kula Centre for Applied Ethics at Santa Clara University, USA12, is described below. This approach is one of the ways to arrive at an ethical decision. There could also be other methods to explore the ways and means for arriving at an acceptable ethical decision. A Framework for Ethical Decision-Making12 (Partially modified by the author from the original work under reference 12) A. Understand and Analyse the Problem and Identify the Apparent Ethical Issues 1. What are the relevant facts of the case? What facts are not known? Can we learn more about the situation? Do we know enough to make a decision? 2. What individuals and groups have an important stake in the outcome? Are some concerns more important? Why? 3. What are the options for acting? Have all the relevant persons and groups been consulted? Have we identified some creative options? B. Evaluate Alternative Actions Evaluate the options by asking the following questions: • Which option will produce the most good and do the least harm? (The Utilitarian Approach) • Which option best respects the rights of all who have a stake? (The Rights Approach) • Which option treats people equally or proportionately? (The Justice Approach) • Which option best serves the community as whole and not just some members? (The Common Good Approach) • Which option leads you to act as a sort of person you want to be? (The Virtue Approach) • Which action makes you feel happy and satisfied? C. Make a Decision by Evaluating Pros and Cons, and Test It 1. Considering all these approaches, which option does best addresses the situation? 2. Share your concern and decision with others in similar situation and observe their reactions and suggestions. 3. Re-examine and modify, if necessary, your option for ‘optimum solution’. (The best solution will always confuse you and elude you.) D. Act and Check on the Outcome 1. Implement the decision taking care to communicate it to all concerned with the issue and the decision. 2. Does the option take care not to harm other stakeholders’ interests? If so, what extra measures are being proposed to mitigate the loss of interests?

12, accessed on 20 September 2011

Introduction to Ethics and its Applications in Business

3. How did the decision turn out in result? Are people concerned with the issue and option satisfied under the specific situation and environment of work? E. Implant the Learning Points in the Organisation Share your experience of ethical decision-making on important organisational issues with colleagues, peers and bosses at a suitable ‘Training platform’. [Ethics is an internal realisation, but comes in to a person from the sensitivity to external happenings and learning.]

As discussed earlier, ethical decision-making becomes more difficult if we are faced with ethical dilemmas. In such difficult situations, we need to rely more on transparent discussions and dialogue with others, that is, different stakeholders of the issue. Only by careful exploration of the problem, aided by the insights and different perspectives of others, we can make good ethical choices in such situations. Illustration: Let’s study a real-life difficult case that poses ethical dilemmas for decision-makers. This high-profile case of proposed Posco Steel Projects in Orissa, India is pending for years for satisfactory resolution13. The case summary is briefly presented below and a study of the related social cost benefit analysis (a concern of ethics) is reported under reference14.

“POSCO-India Private Limited is a planned Indian subsidiary of POSCO, an integrated steel producer with headquarters in Korea. POSCO signed a Memorandum of Understanding (MoU) in June 2005 to incorporate an Indian subsidiary and build a steel plant in Orissa, a state in eastern India. Posco India was incorporated by POSCO in August 2005 with the Registrar of Companies, Orissa, under India’s Companies Act 1956. As of July 2011, various delays and controversies have prevented POSCO-India from building the steel plant in Orissa. The June 2005 MoU expired in June 2011. The State Government of Orissa expects to replace the expired MoU, and sign a new and revised MoU with POSCO. As of September 2011, the MoU renewal remains a subject of negotiation between POSCO India and the State Government of Orissa because the state has proposed changes and new conditions to the original MoU signed in June 2005. The National Steel Policy published by the Government of India claims that each additional capacity of one million tons per annum of steel creates 2,000 direct jobs in India, after accounting for productivity improvements and use of modern technology. The policy document also claims that one man-year of employment in the Indian steel industry generates an additional 3.5 man-years of employment elsewhere in the economy, such as transport, mining, construction, machinery, and steel fabrication. Posco India’s 12 MMT plant, according to this policy document, will create 108,000 jobs in the Indian economy. 13

The Posco India,, accessed on 21 September 2011


The Social Cost Benefit Analysis of Posco Steel Projects in Orissa, accessed on 21 September 2011

Ethics in Business and Corporate Governance

Posco India expected to start steel plant construction promptly after signing the 2005 MoU. However, Posco India has been unable to start construction because of social and environmental controversies. In July 2010, a nineteen-member committee, headed by N.C. Saxena, visited Orissa and made a public denouncement about the non-recognition of forest rights by the Government of Orissa and violation of the Forest Rights Act in the forest areas proposed to be diverted for the POSCO India project. The committee urged the Ministry of Environment and Forests of the Government of India to withdraw the clearance given to the State Government for diversion of the forest land. In August 2010, the Ministry of Environment and Forests of the Government of India, in response to the claims of the NC Saxena committee, issued a stop work order. The order directed that all land acquisition and transfer for Posco India project, including handing over of the forest and non-forest land, be stopped forthwith, and details submitted to the Ministry. The State Government of Orissa and Posco India respected the stop work order of the Government of India. Then the Government of India appointed a four-member committee headed by Meena Gupta for examining violation of the ‘Forest Rights Act’. This committee claims to have conducted intensive inquiry by consulting a large number of documents, field visits and meeting a large number of people (including officials of the Orissa Government, local affected inhabitants, NGOs and civil society and experts in concerned fields). The committee after examining various social, ecological and environmental issues returned a split report to the government of India in October 2010: Meena Gupta, the committee chairwoman, acknowledged that Scheduled Tribes enjoy an important constitutional status in India, and disturbing or displacing them stands on a different footing from the displacement of other people. She claims Posco India plant is planned to be located in a coastal district which is not a Scheduled Area and has virtually no Scheduled Tribe people. The people to be displaced are mostly agricultural and fishermen families (about 700 families). She further claims that the land earmarked for Posco India is classified as forest land, but this area is mainly sandy waste, having some scrub forest apart from casuarina plantations. The other three members of the committee claim that past satellite imagery data suggests that the current areas under casuarina plantation in the coastal areas were in the past covered with mangroves. These forests were destroyed either during super cyclones or by illegal cutting. The members also claim that 21 names from the voter list of 2006 of the area, where land is proposed for Posco India, belong to Scheduled Tribes protected by the Forests Rights Act of 2008.” In sum, the Posco case typically presents the ethical dilemma caused by the conflict between the principles of ‘rights’ and the ‘common good/utilitarian’ approaches.According to the ‘rights’ approach, the tribals stand to lose their rights to forest land if the POSCO project comes up at the proposed site. And, according to the ‘common good/utilitarian’ approach, the society and the nation stand to lose huge employment and wealth generation potential if the POSCO project is disallowed. Because of this ‘dilemma-catch’, the project could not take off since 2005. Here, the choice is not between ‘right or wrong’, but between the ‘right and right’, presenting

Introduction to Ethics and its Applications in Business

a ‘grey area’ where social scientists and the government agencies are confused.This situation led to no action by the authority for long and now threatens the project to be scrapped or shifted elsewhere. If we apply the steps of solving ethical dilemma, we get the following best answer: Step 1: Problem is ‘right versus common good’. Step 2: Consequences are displacement of 750 tribal families, destruction of forest land, and change in the ecology of the coastal belt. Step 3: Options are: Relocate to avoid some villages, if possible; more than compensate with assured rehabilitation and long-term living income guarantee; plant equal number or more trees to compensate the forest and environmental loss; avoid construction of high structures and discharge of industrial effluents in the coastal area affecting the ecology; and promote ecological and environmental development work. Step 4: Examine the options from the ethical point of view by taking into account the views of the affected people and social scientists working in the area. Application of the ethics of common good/utilitarian approach to the problem seems to win the heart, but tribal people cannot be left in the lurch. Step 5: Decision: (An illustrative decision only; this might not be the decision of the authority) Allow the project to use the earlier allotted land. Failing that, the consequences would cost the region and the nation dearly. Amend the law for tribal land acquisition at the State level, making it possible to acquire tribal land whenever necessary for exceptional cause of common good, with provisions for liberal special compensation to tribal people for securing their well-being and future living.The amended law may also impose conditions of special actions for full guarantee of the future prosperity of the affected people, such as by employment, promoting local environment-friendly business and making the project owner to allocate a part of the project money for CSR activities. Amend the project agreement with Posco with the provision for compulsory compensatory measures to protect and promote environment and ecology of the area. Finally, there could not be a one-line satisfactory answer to all the problems in a difficult ethical issue, and ethics may also not satisfy everybody’s interest. It is particularly true in cases where serving someone’s interest prohibits the ‘rule of maximum benefits to maximum number of people’ or the ‘common good principle’. A decision is good if it has been taken fairly by considering all the options and chosen the best one that satisfies one’s moral values and conscience. We must remember that ‘ethical perfection is illusionary’. Notwithstanding these difficulties, we have to take ethical decisions regarding our work and professions in a business because a business’s chance of survival and sustainability depends much upon its ethical behaviour and standards. So far, we have focused our deliberations on the fundamentals of ethics and the acts of ethics without distinguishing how ethics can work in a business that is carried out by many people under the same umbrella and as per direction of a

Ethics in Business and Corporate Governance

few at the top and the business head. Hence, our next step would be to discuss: how ethics work in business?



It would be relevant in this introductory chapter to examine how the aforementioned ethical rules and approach work in business set-up. A business operation includes a collection of people working as a group under certain authority, with an assortment of activities directed by few at the top, and run with a view to achieving certain objectives. It also has certain goals and objectives, and the methods of working are regulated and controlled by some laws and statutory regulations. Therefore, a business organisation is run more like a machine (i.e., with built-in mechanisms) where systems and discipline are the key requirements. This is applicable to all types of business, such as manufacturing industry, service industry, commercial houses, institutions, hospitals, societies, governments, NGOs, etc. Because of the fact that organisations are run and supervised by a small group of people at the top (called the management team) who usually know what they are doing, these people can choose what rules and methods to follow and can decide rules (pertaining to behaviour) for its employees (including themselves) so as to adhere to ethical business practices. Such set-ups and systems can, therefore, assure that every business is in a position to exercise controls over the collective and individual behaviour of its people—who are a part of the organisation and whose behaviour represents organisational behaviour. This means that business organisations are in a position to control and regulate their own and their members’ actions by framing appropriate rules and codes for moral standards and behaviour, and people working in the organisation have the responsibility of behaving and acting in conformity to the rules and codes of moral standards. The failure of an individual to comply with these codes and rules can be judged as ‘wrongdoing’ (or misconduct) and that individual can be held morally responsible for his or her act and its consequences. Therefore, responsibility for ethical behaviour, which relates to the morality of decisions and actions in business practices, rests on individuals working in the organisation. Thus, ethics, in business practices, are reflected through the display of feelings, reasoning, deliberations and actions of individuals in the business. Let us explore this point further with the example of an employee: An employee was asked by his boss to fabricate a report exaggerating the performance of the department. In return for his act, the boss promised him some benefit. They both willingly joined hands to fabricate a report for mutual benefit. In this case, fabrication of a report untruthfully is against the moral standards of an employee (especially being a custodian of the task of reporting), and benefiting from such an act is unethical. If the employee obliges the boss, he is doing so on his own accord and shall be held accountable for his unethical act. The boss will be also judged unethical for having induced or forced his employee to do a wrong that is not in keeping with his position and his responsibility towards the company. In this case, both the employee and the boss are acting as individuals, and are choosing their acts as per their own moral standards. The business organisation, for which they both work, is not responsible for this moral failure and unethical act—as long as the organisation has not willingly agreed and approved of the actions of these employees.

Introduction to Ethics and its Applications in Business

This leads us to the question: How can business, as an organisation, be held responsible for ethics? Some may argue that, unlike an individual, a ‘business organisation’ cannot have feelings, which are an important rider in the analysis of moral standards. Therefore, it cannot be held responsible for ethics and morality.And, whether ethical principles and moral standards discussed thus far are equally applicable to business? The answer is ‘yes’. Because modern corporations are organisations which the law treats as ‘immortal fictitious persons’ who have the right to sue and be sued, own and sell property and materials, and enter into contracts—all in their own names. Hence, if the law can be applied to business, then why cannot ethics be applied to business? Thus, businesses can be held responsible for their actions—be it legal or ethical—in the same way as a ‘person’.This view is taken considering that actions and decisions of business originate from the choices of individuals who are acting on behalf of the organisation. Moreover, a business comprises systems, (corporate) processes and its people (including its customers, suppliers, investors and shareholders), wherein an individual or a group empowered by the company takes decisions and acts on behalf of the enterprise to further the cause of the business objectives. These individuals who own, invest or work in the company are guided by motives and objectives as set and directed by the company as well as by the rules framed by the company in order to coordinate and control individual actions and efforts to accomplish certain outcomes and objectives. Therefore, a company’s actions and behaviour have to be equally moral and responsible as that of an individual, so as to ensure right direction and no wrongdoing or harm to the society, employees, investors, suppliers, etc. —all of who are a part of the business and are interested in its beneficial objectives/outcomes. Therefore, a business organisation cannot escape its ‘moral responsibility’ for actions under the cover that an organisation cannot have feelings to understand the effect of its action. A business cannot have feelings, but its people can have the necessary feelings, and they are expected to act with feelings, reasoning and deliberations while working for and on behalf of the business. The corollary of this would be: ‘Corporations do not commit crimes, people working for it do’. Analyses of ethics in business consider if those individuals or groups who are working for the company have upheld the acceptable moral standards in their acts and deeds during the course of business operations. And, if an act has not been judged moral or ethical and the same had the approval of the company, then the responsibility of the consequences of that act rests with the organisation and not the individual. This implies that, in effect, business ethics focus on rational evaluation of moral standards of those individuals or groups who have acted (or act) on behalf of the enterprise regarding its business policies, procedures, dealings, behaviour and motive. However, in the process of rational evaluation, the principles of moral reasoning and principles of ethics (to be discussed in the next chapter) are examined. The foregoing discussions establish that business organisations have the moral responsibility to ensure that their policies, practices and behaviour (of its members) are fulfilling legal as well as moral standards of the society and the country. They cannot indulge in immoral activities, be unfair in business practices, harm the health of consumers or cause damages to the environment. Let us understand this by referring to the earlier case wherein a subordinate was asked by his boss to fabricate a report for mutual benefit:

Ethics in Business and Corporate Governance

It was argued that both the employee and his boss had acted as individuals, and chose to act as per their own moral standards. Hence, as individual employees, they were responsible for the unethical act and its consequences. Accordingly, if the seriousness of their wrongdoing calls for legal action, they can be penalised as per the standing rules of the company and law. The business organisation, for which they work, is not responsible for this moral failure and unethical act—as long as the organisation did not willingly agree and approve of the actions of its employees. Now, let us assume that the same report had been submitted to an external auditor (i.e., statutory auditor) to comply with a statutory requirement (e.g., for annual audit of the company’s accounts), and that it was done with the full knowledge, connivance and agreement of the top management (i.e., the company). Under this condition, the act will be considered as an ‘unethical business practice of the organisation’ as well as of the individuals concerned (including the top management) who had fabricated, connived and subsequently submitted the report to the auditors. In this situation, the employees involved in fabricating and submitting the report will be held responsible for unethical acts as individuals, and the company will be also made responsible for ‘unethical business practices’. What could then happen (as penalty or punishment) to the employees and the company is a different matter, which would depend on the gravity of the wrongdoing and its impact on the business, investors, employees, public and the society.

While the exact ways of dealing with such situations shall be discussed later in this book, the high-points of such unethical acts and their consequences on individuals and the company can be illustrated with reference to the infamous scandal at Enron, USA. Before its collapse, Enron was the world’s largest energy generating and utility company, but it was totally wiped out soon after the scandal, and many of its senior executives were sentenced to jail. To recapitulate, Enron Energy Corporation, of USA collapsed in 2000 due to large-scale accounting frauds, scandals and unethical practices, which were planned and practiced by a few top executives—including the Chairman and Chief Executive—and were supported and perpetuated by their audit firm, Arthur Anderson (AA), the world’s fifth largest accounting company. A few of Enron’s top employees, including its Chairman, Kenneth Lay, fabricated financial statements through the 1990s with the help of auditors at AA—thus cheating the investing public and institutions with the intent of personal gains. They cooked the company’s book of accounts, suppressed the true health of the company’s finance, duped the stakeholders, and apparently made substantial gains for themselves. When the financial scam was brought to light in 2001, it was too late to save the company—leading to the collapse of this corporate giant. Investigations revealed that many top officials at Enron and some from its accounting firm were guilty of fraud and immoral acts for personal gain. As a result, the licence of its accounting firm was also cancelled by the US regulator for unethical practices, leading to the closure of one of the ‘big five’ accounting firms in the world. At Enron, concerned officials were legally charged as individuals and punished (that included jail terms) for the fraud, and the company faced many legal cases filed by the regulators, aggrieved shareholders and

Introduction to Ethics and its Applications in Business

investors. Due to the widely publicised unethical and fraudulent acts, financial institutions immediately withdrew any further support to Enron—making its financial condition even more precarious. In the face of numerous lawsuits and huge debt, the company had to file ‘bankruptcy’ at the US courts, and this once-global-corporate-giant collapsed totally15.

However,with respect to business operations in general,the logic and methods of reasoning—to establish if an action has been moral and ethical—need to be understood in retrospect to the purpose of business organisations, their structures, environment, obligations and regulations controlling the business. Some aspects of a business organisation and its structure, and how they correlate to ethical behaviour, therefore, need to be examined. In this context, at least two aspects of business have to be considered: (a) purpose of business; and (b) how and who takes decisions for the business. With regard to (a), it is an accepted fact that every business is set up and run with a common purpose, which is to make and maximise profits for the stakeholders. There is nothing wrong in this approach, but what makes the difference is the concept of ‘stakeholders’. Not the few who head the business (or take decision for it) and can make money; stakeholders include shareholders, promoters, employees, suppliers, buyers, society, government, nation, etc.; in short, the term includes all those who can rightfully expect to gain from the operations of the business. Hence, there is nothing wrong for business to make profit or gain, but that gain must be accomplished by legal and ethical means and must be shared equitably by all stakeholders and not by a few at the top. As regards (b), it is the top management—including the Board—that takes the decisions through structured levels and delegated responsibilities. These individuals at the top are in a position to frame, guide and control the organisation and organisational activities, and are responsible for ensuring that the organisation’s actions are legal and ethical. In the greater perspective of the nation and society, nation needs business as the vehicle for economic growth, and business needs the nation and its national resources—including consumers, finance, market, infrastructure, environment, etc.—for its growth and survival. They are interdependent; each one provides a platform for growth to the other. Then, how can business leaders, or the people employed in business, be oblivious of their (moral) duties and responsibilities to other stakeholders? Ethical issues in business arise from this standpoint of business purpose and operations. Most aspects of ethics and moral behaviour in business arise from the concept of rights, justice and fairness of deals with respect to its various stakeholders. These dealings can be with employees, customers, dealers, suppliers, local bodies or the government. Ethical principles are, therefore, essentially based on the elements of rights and duties, justice, fairness and care. For example, if a company does not pay fair wages to its employees, the employees feel discriminated against or exploited. If the senior executives get disproportionately higher remunerations than the others in a company, then general employees feel differentiated and deprived. If the company practices differential pricing for its products, buyers who pay more feel aggrieved. If a company’s supplier does not get a fair share of business, despite offering competitive price and quality, he

15, accessed on 30 September 2011

Ethics in Business and Corporate Governance

or she feels deprived. If the company is ‘adjusting’ its book of accounts to minimise payment of taxes, the society feels it is evading tax. If a company pollutes the environment through its effluents, it angers the society by causing and spreading ill-health. All such feelings are indicative of the fact that affected people are not satisfied with the morality of actions, and they feel that such actions are unethical—though there may be reasons behind each (immoral) act. It has been stated earlier in this chapter that if any behaviour can be satisfactorily reasoned out from the standpoint of ‘moral reasoning’, then that behaviour may stand the test of ethics. But, it should be appreciated at this stage, that such moral reasoning must also satisfy the guiding principles of ethics for it to be regarded as ethical. Judgment about ethics in business is embedded in the inherent concepts of rights, duty, care, justice and fairness. Ethical practice of business must, therefore, ensure reciprocal rights and correlated duties of the parties involved in business operations, fairness and justice of decisions and actions, care and concern about people and stakeholders of the business, and equitable distribution of benefits (or protection from harm and damages) of interests. These aspects of ethics will be examined in the next chapter on ethical principles. However, before moving to the discussions of ethical principles, let us further examine the role and scope of ethics in business, its approach and coverage (see Figure 1.6).

Ethical standards of operatios

Ethics of corporate governance

Social benefits

Ethics of business Figure 1.6 Ethics of Business

1.8 THE ROLE AND SCOPE OF ETHICS IN BUSINESS Ethics in business or business ethics, as it is popularly called, deal with application of ethics to business operations, processes, actions, decisions, transactions, dealings, treatments and outcomes concerning all stakeholders, both internal and external, of a business. The internal stakeholders of a business are its employees, suppliers, shareholders and other investors, and the external stakeholders are the customers, society, government, locality and environment. The aim of

Introduction to Ethics and its Applications in Business

business ethics is to create a deeper understanding of what is good and bad, what is moral and immoral or what actions are right or wrong in the operations of a business with respect to its customers, employees, investors, society, and all other stakeholders in order to protect them from harm and damage to their interests. The subject covers not only traditional businesses but also institutions, service providers, society or the assortment of activities relating to consumers and users of goods and services. Business ethics are concerned with the morality of actions in business operations, and deal with (1) rightful expectations of consumers, society, employees and other stakeholders, (2) fairness in competition and advertising of goods and services, (3) social responsibility and care, and (4) overall corporate behaviour in governance.The ultimate aim of business ethics is to protect people, society and all direct and indirect stakeholders from damages. Common examples of immoral business practices in an economy are: bribery to manipulate business interests, manipulation of market conditions for unfair practices and pricing, non-transparent business transactions, violation of environmental laws and deficient customer services. Bribery, corruption in public places, exploitation of labour market, unfair wage structures, unequal opportunity based on colour, creed or sex, hazardous working conditions, unmindful destruction of ecology and environment are a few of many unethical practices prevalent in businesses and industries. And, all these activities are primarily carried out by individuals either out of their own choice or on the bidding of their organisations. These non-moral actions in business operations always hurt the interests of others in the business cycle or the society and its people at large. The purpose of ethics in business is to protect these people and stakeholders from such unsuspecting damages to their interests arising from the choices and actions of either a business organisation or its employees. While analysing a business organisation’s ethical behaviour, it should be noted this organisation is composed of human individuals who act under certain relationships and circumstances to perform certain assigned activities and responsibilities for the propagation of business.Therefore, a business organisation’s acts and choices originate from individuals who work for it. Because of the fact that the business organisation’s acts originate in the choices and actions of individuals, it is these individuals who must be seen as the primary bearers of moral duties and responsibilities for upholding business ethics. In all corrupt and failed business cases discussed so far, few individuals at the top had been responsible for ethical violation and destruction of value in business. More businesses failed due to violation of ethics than insolvency; cases in hand are the failures of Enron of the USA and Satyam of India16—two large MNCs who had been the leaders in their respective field of business. In these companies, few individuals at the top, especially their CEOs, had been responsible for ethical violation, account manipulation and frauds to bring down their companies. These failures point to the fact that ethics in business largely depend on the honesty, integrity and character of individuals serving the business. But there are also instances where businesses courted trouble due to risky business models, unrealistic business targets, loose administration and slack regulatory controls.

16, and 08satyam.html, accessed on 14 November 2011

Ethics in Business and Corporate Governance

All these causes originate from an organisation’s policies.Therefore, judging ethics in business would require examination of (a) how ethics and ethical standards of working for individuals are introduced, maintained and managed in an organisation, and (b) how ethical principles and ethical governance are factored into the organisation’s policies and programmes. Also, for effective integration of ethical standards with business practices, there have to be effective regulatory controls over the conduct of business and professions in a country. The study of business ethics and their practice, therefore, requires examination of the practical aspects of business operations and how much of ethical standards have been maintained and displayed in different actions and behaviour of an organisation. This has been a direct method of examining the ethicality of actions or organisational behaviour. But business operations, which is the sum total of taking policy decisions, setting goals and deciding and pursuing a practical course that will ensure the best results, involve a large number of functions, namely organising, structuring, manning, systematising, administering, controlling and managing. Also, business situations are not static, that is, they change with time, place and context. This brings about changes in circumstances, business environment and goals thus necessitating corresponding changes in the course and conduct of a business. Since business ethics encompass a wide variety of topics and situations, therefore some schools of thought suggest examining these ethics by grouping them into three categories: (1) systemic issues, that is, issues related to the systems of carrying out business (2) corporate issues, that is, issues of ethical questions raised about the way a particular company decides its policy and operates and (3) individual issues, that is, issues of the ethical behaviour and ethical questions about individuals within a company. They argue that often business operations present us with situations where decision-making involves tackling a large number of extremely complicated and interrelated issues that can cause confusion unless these issues are first carefully sorted out and distinguished from each other. This may be illustrated by considering a simple example from the Indian industry, which is not uncommon in spirit and can be accepted for the purpose of illustration. Let us consider the following case: ‘An official of a company, operating in the eastern part of India, was asked at a very short notice to travel to Delhi for getting one of their operating licences renewed immediately. The licence in question is a mandatory requirement under the factory law for safety. The company overlooked the renewal date and failed to take advance action, leading to this emergency. Without that operating licence, one of the company’s mills has to be shut down immediately. Hence, the officer was given the task of getting the licence renewed with utmost urgency. The officer travelled to Delhi immediately on company’s duty. On reaching Delhi and meeting the respective authority for renewal, he realised that some gratification was required to be given to the person concerned with the licence renewal job to move the case on priority. But his company as a rule did not allow any bribe to expedite any business related actions in principle. Knowing well that the licence renewal on priority was not possible without gratification of the concerned staffer, the officer conveyed the reality to his boss in the works.

Introduction to Ethics and its Applications in Business

However, the boss was helpless in meeting the gratification demand due to the company’s policy. Finding no other way to expedite the licence clearance, the officer adopted an indirect method of pleasing the head of the licence renewing authority. He invited the head to a lavish dinner to explain the urgency, make him sympathetic to the cause and act urgently. He kept his boss informed about this step. This dinner was successful but cost the officer many times more than the daily allowance he was entitled to charge from his company for his Delhi stay. The officer spent the money at his own risk only to fulfil an urgent need of his company. After succeeding in licence renewal, the officer returned and submitted the actual bill to his company. But the company’s finance department refused to pay. He then withdrew the bill and resubmitted a second bill showing the same expenses but under different heads, for example, exaggerating the transportation bill and few other entitlements, as suggested by his sympathetic boss. But the bill manipulation spelled trouble for him, as the finance department held him guilty of submitting inflated travel bills and issued him a show-cause notice for disciplinary action’.

Reacting to the show-cause notice, the officer’s colleagues asked him whether the company was morally and ethically right to punish a person for his sincere efforts to serve the interests of the company though he had legally violated the travel rules. In this case, there are elements of systemic issue, corporate ethical issue and individual issue.These elements are: (1) The officer did not do any manipulation of travel bill for personal gain. (2) The company entrusted the officer with a task without providing resources that such a task calls for. (3) The officer acted according to the situation-specific need to save his company from loss due to mill closure that could have led many to job loss. (4) The company’s system did not allow any relaxation of travel rules for uniformity of application. (5) The finance department scrutinises travel bills with focus on ‘what rules state’ rather than ‘exigencies of the organisation’s need or utility’. Judging who is moral and ethical in this case is a bit dilemmatic and complex matter. However, distinguishing the issues as per systemic, corporate or personal ethics can be helpful. In this particular case, the officer cannot be blamed for compromising individual ethics in discharging his duty. He had resubmitted the bill where he might have tried to manipulate the provisions of travel rules. However, that was done not with profit motive but to get compensated for what he actually spent.The system (i.e. travel rules in this case) of the company should be transparent and uniform for all, and it should be respected. Hence, the company was right in rejecting his travel bills. The company was also ethically right by not indulging in bribing. Then, how can one operate ethically within this system? It is the task of the management to provide resources for any job or official deputation to the extent it is fair and just; and to that effect there should be provision and management controls in business practices. In this case, it will be unfair and injustice if the officer is punished for his action. Fairness and justice call for examination of the motive for an act, and not the process of act only. In fact, many companies are found to be lacking in systems to promote good, transparent and ethical work culture. Morality and ethics with respect to these distinguishable issues have been discussed earlier as general rules, but how can we consolidate those moral and ethical rules in business-specific practices? This is

Ethics in Business and Corporate Governance

the crux of ethical business practices. The practitioners of business have the task of balancing a decision or action by considering ethical issues from various angles (as brought out in the aforesaid example). Ethics are not an administrative tool but a template that acts for protecting and propagating fair practices to ensure justice, fairness and care to all involved in the business process. There is somewhat similar approach to looking at ethics and ethical practices in business, but with more clarity. This task of ethics for protecting and propagating fair practices in business can be best fulfilled by examining different aspects of business operations. The practitioners of business ethics suggest that the best way to consolidate and understand the ethical issues and ethical practices in business would be to examine the ethics in relation to ethics of business philosophy (i.e., principles and practices) and ethics of professional management in different areas of business operations. The ethical issues in these areas of operations are by and large systemic and corporate, but do not altogether exclude individual ethics in analysing cases.This approach stands out because of its in-built character in assigning responsibility to the company for structuring corporate processes and policies with an eye to what could be judged logical, ethical and fair to all stakeholders.The cases described in the beginning indicated a lapse of ethical structuring and policy formulation leading to greed and risky financial transactions and measures. It is widely held that ethics in today’s business get reflected through: corporate governance (responsible for organisation structuring and policy formulation, execution, monitoring and controls); corporate social responsibility (CSR) that ensures integration of social well-being with the corporate goals; and systemic management of people, processes and outcomes. The latter is also a part of corporate governance when considered in totality. Broadly, ethics in business practices involve: (a) ethics as applicable to business philosophy, namely corporate governance involving structuring, policy formulation, management, employee relations, social justice, ethics in marketplace and environment management and (b) ethics of professional management, namely ethics of human resource management, financial and accounting management, engineering and new product development, sales and marketing, R&D and IPR. Holding onto ethical business philosophy and professional management is the responsibility of the corporates and their managements. In addition to the ethics of professional management, which is the corporate responsibility, there is also a need for professional ethics of individual professionals engaged in different fields of business operations, for example, engineering, accounts, human resource management, sales and marketing and advertising. The need for control over ‘professional ethics’ relating to professions such as medical and advertising is more a social demand than viewing these professions as business organisations because the society stands to lose or gain much by their ethical standards of behaviour. Professional ethics of few important professions of our time will be discussed in a subsequent chapter. Control of professional ethics in business practices is assuming overwhelming importance in present competitive and service-oriented business environments. Business ethics guide the application of ethical rules and principles discussed so far in the context of commercial and business transactions, for example, the relationship between the employer and the employee, the relationship between the business and the customer and the obligations to the society. Business ethics examine various moral and ethical problems that can arise in business operations, and help understand and make specific judgments about what ought

Introduction to Ethics and its Applications in Business

to be done and ought not to be done. The main purpose of business ethics is to guide business organisations in the light of ethical principles, discussed so far, for dealing with (a) various practical and situational problems in their operations, (b) discharge of specific duties and responsibilities of the business, and (c) conformance to ‘ethical standards’ as recognised by the society, government and regulators. For example, looking after the distress of a loyal employee is considered ethical, whereas the violation of environmental pollution norms, under whatsoever compelling situation, would be considered as not conforming to the expected ethical standards. Hence, a company’s business practice must cover wide-ranging ethical issues starting from the employee welfare to the environment protection and development. However, such ethical binding or responsibility must not be seen as a restraining factor in business operations. Because the ultimate aim of business ethics is not to hold back the interests of business operations in terms of economy but to strengthen the decision-making process to stop sufferings from bad employee morale, poor market reputation, lack of customer support, legal and social penalty, and such other consequences that may deter the economic progress of the company. It is in the long-term interest of a company to be ethical in its operations, management and dealings with the customers and society. There are plenty of instances in the corporate world (similar to corporate giants like Enron, WorldCom and Satyam) where businesses had to close down due to unethical practices. Many moralists had looked into business with suspicion, considering business as an institution of making money even by trampling on the humanity and violating ethics. There are many examples in the business world where greed for more profits had led the organisations to destroy environment (e.g., destroying forests for woods), indulge in immoral business practices (e.g., selling adulterated food stuff and drugs), deal in fake drugs, manipulate account books to deprive fair share to stakeholders and deal in arms smuggling for civil wars in other countries. But, those actions had mostly resulted in very short-term benefits to them, if any, and always reminded business professionals the necessity to be moral in outlook and ethical in dealings for driving long-term business benefits. The need for ethics in the society and business is an age-old necessity. Hence, all moral philosophers advocated maintaining ethical standards in the society and business practices. However, some moral philosophers also believed that business and ethics are at odds and in contradiction with each other. They argued that determining and doing what is practical from the viewpoint of business profits and what is moral involves two different lines of thoughts that cannot be reconciled. But with the growth of industries and global business, the purpose and objectives of business have been redefined, especially with respect to customer satisfaction and customer support. In a competitive business situation where customers (the term includes all stakeholders like consumers, investors, employees and suppliers) have the choice of deciding what they should buy and from whom, or where they should invest, work or supply, the ethical image of a company and business has become important. Planning a business system and strategy by holding onto ethical principles is now accepted by all as an essential requirement for long-term survival and benefits of business. There are plenty of examples to show that customers go to where ethics are. Hence, the business world is now faced with the challenge of tailoring business models and practices in a manner that agrees with the principles of ethics. Ethics are not at odds with the purpose of business in an open and competitive market. With the

Ethics in Business and Corporate Governance

increasing globalisation of business operations, development of rapid communication avenues, surveillance of electronic and print media, and general awareness of rights and duties by stakeholders of business, ethics in business operations and management have become a benchmark of good governance and a hallmark of brand image and success in recent times. No industry or business can now deny the moral rights to its employees and customers and can evade the moral responsibility of protecting the health and environment of the society in which it operates. A business has ethical responsibility to its employees, society, government, and other stakeholders who are related to the well-being of the business. Remember a business exists for the customers and society and not the vice versa. Many NGOs in India are now successfully focusing on the prevention of ethical violations of duties and responsibilities, especially in social services and social welfare measures. In fact, ethical considerations often lead to the optimisation of benefits of a decision, which otherwise would have been considered as conflict of interests.The following illustration, though a trivial one in business operation, may clarify the situation. The demand for festival bonus in our country is not uncommon. It is also not unknown that there were many instances of work stoppage or strike due to non-payment of festival bonus. Is festival bonus a right in our country? The system of giving ‘festival bonus’ in Indian companies is based on the ethical principle of ‘care’ with a view to helping employees celebrate the festivity without financial hardship. It is generally considered that such ‘care’ by the management at the time of their need keeps the employees committed and motivated to the cause of the company. This bonus system involves sharing the cash surplus with the employees. However, some shareholders (who are not receiving such festival bonus) may regard this system as wasteful and a load on the cash-flow management, thereby limiting the utilisation of company’s resources for making profits—the primary purpose of shareholders’ investments. From the perspective of shareholders’ interests versus employee benefits, the system of giving festival bonus may appear a conflict of interests. But, a more realistic and perspective analysis will show that the action is likely to lead to greater productivity and profitability with the help of improved morale and motivation of employees. Thus, the action may actually benefit both the parties in the business.

Thus, following the ethics of care of its employees by a company at the time of their need can be looked upon as a good business strategy than a conflict of interests. Looking at this problem as a conflict of interests would lead to a very short-term gain and greater losses in the long run. Thus, an important role and scope of ethics in business is reconciliation and harmonisation of conflicting interests. In view of the role and scope of business ethics discussed here, ethical issues in business practices would involve studies of: how individuals are encouraged to maintain ethical standards in business, how the company takes care of consumers and the market environment, how the company encourages standards of professional ethics, how the company takes care of the ethics related to environment and ecology and the quality of corporate governance including corporate social responsibility (CSR), which is now strongly looked upon as a ‘social view of business’; CSR is no longer considered voluntary but obligatory. Various chapters of this

Introduction to Ethics and its Applications in Business

book will focus on the ethical issues related to business, professions and individuals engaged in business operations, including the issues of ethical corporate governance.

Summary 1. This chapter aims to: (a) Develop concept of ethics vis-à-vis morality and moral responsibility and moral judgment in the society as well as in the business; (b) Identify and highlight relevance of ethics in business and its functioning; and (c) Introduce corporate governance and corporate social responsibility vis-à-vis their functions and ethical necessity 2. The chapter explains and establishes the relationships of morality, moral principles and moral standards with ethics with the help of several examples so as to offer the right concepts and approaches to ethics. 3. It illustrates how ethics are not only aimed at well-being in personal life but also make for a critical factor in business, where individuals are the key components for decision-making and actions. 4. Business actions are influenced by individuals and that’s why ethics in business and corporate governance are so critically dependent on the quality of people and their moral standards of behaviour and actions. In this regard, morality, moral standards and moral reasoning—to establish moral responsibility—have been discussed thoroughly. It has been emphasised that, to understand the role of ethics in business, we have to first understand the issues that govern the ethics in personal life and then incorporate them in business dealings. 5. Ethics and law are not opposed to each other; they mostly complement each other with the purpose of preventing wrongdoings in society and in business. Yet, ethics go beyond the jurisdiction of law; they essentially deal with the issues of morality and moral standards in a wider social perspective in order to determine if acts and their consequences are morally acceptable and ethical in society. 6. Ethical principles, derived from the requirements for being moral, fair and just, are not rigid like laws or religious commandments; they are flexible abstract principles dealing with morality, justice, equality and fairness. Justice, social welfare, equality, human rights, respect and rights are a few examples of the subject matter that ethics deal with. Ethics attempt to observe if ‘moral standards’ are maintained in dealing with those subject matters that affect the interests of people and society. 7. Moral standards have certain characteristics; they deal with matters that have serious implications for individuals and the society, and are evaluated on the basis of good reasoning—and not authority or regulations. Any judgment concerning moral standards must overlook self-interest and should be based on impartial considerations. Typically, violation of moral standards is associated with self-inflicting feeling of badness and guilt. Upholding moral standards in our acts and deeds has, therefore, become the primary pointer towards ethics in personal life or in a business.

Ethics in Business and Corporate Governance

8. Business ethics focus on a rational evaluation of moral standards of the individuals or groups that may have acted on behalf of the enterprise, regarding its business policies, procedures, dealings, behaviour and motive. These individuals are thus the custodians of business ethics. And, in order to aid these individuals in ethical decision-making, the study of business ethics, as a subject, aims to create a deeper understanding about: what is good and bad, moral and immoral or what actions are right or wrong vis-à-vis business operations—be that of an organisation, institution, society or activities relating to consumers (users of goods and services). Business ethics are concerned about, and deals with, rightful expectations of consumers, society and employees, fairness in competition and advertising, social responsibility and overall corporate behaviour. 9. This chapter presents a road map (flow chart) to decide what is ethically right or wrong. What is moral at one stage of our lives may not be so at a different stage because of the change in our understanding about one’s own needs and those of the society, family, surroundings, human rights, nation and the institution we work for. This also happens with the development of our sense of logic and reasoning when it comes to identifying what is rational and universal—as discussed with reference to Lawrence Kohlberg. Moral reasoning is not a simple, straightforward analysis of factual information for decision-making; it requires sensitivity to the issues involved, a clear and unbiased mind, and an understanding of the expectations of society or beneficiaries or the aggrieved persons, the restrictions of law, environment, codes of conduct in an organisation or society, and other factors that may limit the scope of moral judgment. 10. The chapter also critically discusses the role and scope of ethics in business and how ethics work in business organisations that are, in fact, run by few individuals. It goes on to show that a business organisation cannot escape the ethical responsibility for its actions under the excuse that it does not have feelings necessary to understand the effect of its actions. A business organisation’s actions are taken by individuals who have the necessary feelings, and they are expected to act with feelings, reasoning and deliberations while working for and on behalf of the business. In this connection, it has been pointed out that laws governing the conduct of business also treat business as ‘immortal fictitious persons’ who have the right to sue and be sued, own and sell property and materials, and enter into contracts—all in their own names. Therefore, if law can be applied to business being an organisation, then why we cannot apply ethics to business? 11. Most aspects of ethics and moral behaviour in business arise from the concept of rights, justice and fairness of deals with respect to its various stakeholders. These dealings can be with employees, customers, dealers, suppliers, local bodies or the government. Ethical principles in business are, therefore, essentially based on the elements of rights and duties, justice, fairness and care of different stakeholders associated with the business. The judgment about ethics in business is embedded in the inherent concept of rights, duties, care, justice and fairness. Ethical practices in business must ensure reciprocal rights and correlated duties of the parties involved in dealings with the business organisation, fairness and justice of decisions and actions affecting the stakeholders, care and concern about the people who work for it, and equitable distribution of benefits of interests or protection from harms and damages. 12. Finally, the role and scope of ‘business ethics’, as a subject, has been deliberated. It has been pointed out that the aim of ethics in business (the subject matter of business ethics) is to create a deeper understanding of what is good and bad, what is moral and immoral or what actions

Introduction to Ethics and its Applications in Business

are right or wrong in the operations of a business with respect to its customers, employees, investors, society and all other stakeholders in order to protect them from harm and damage to their interests. The subject covers not only traditional businesses but also institutions, service providers, society or the assortment of activities relating to consumers and users of goods and services. Business ethics are concerned with the morality of actions in business operations, and deal with (1) rightful expectations of consumers, society, employees and other stakeholders, (2) fairness in competition and advertising of goods and services, (3) social responsibility and care, and (4) overall corporate behaviour in governance. The ultimate aim of business ethics is to protect people, society and all direct and indirect stakeholders from damages. 13. The main purpose of business ethics is to guide business organisations in the light of ethical principles in dealing with various practical problems in their operations, and conform to specific duties and responsibilities that might arise due to the necessity of being ethical or for conforming with the ethical practices as recognised by the society, government and regulators. A company’s ethical obligations vary widely, ranging from the employee welfare to the environment protection and promotion. However, such ethical binding or responsibility must not be seen as a restraining factor in business operations. Because the ultimate aim of business ethics is not to hold back the interests of business operations in terms of economy, but to strengthen the decision-making process in order to stop sufferings from bad employee morale, poor market reputation, lack of customer support, legal and social penalty, and such other consequences that may deter the economic progress of a company. It is in the longterm interest of a company to be ethical in its operations, management and dealings with the customers and society. There are plenty of instances in the corporate world (similar to corporate giants like Enron, WorldCom and Satyam) where businesses had to close down due to unethical practices.

Key Words and Concepts Concept and definition of ethics, aim and purpose of ethics, moral standards and moral responsibility, methods of moral reasoning, moral judgment, moral principles and values, moral justification, characteristics of moral standards, characteristics of ethical standards, violation of moral standards, fixing moral responsibility, fairness and justice, scope of business ethics, how ethics work in business, concept of stakeholders, corporate governance, corporate social responsibility, ethics officer, sustainable development.

Exercises Check Your Progress 1. 2. 3. 4.

Study of business ethics involves an understanding about ___________ Ethics in personal life refer to ___________ Moral standards are based on ___________ ‘Moral responsibility’ would mean owning ___________

Ethics in Business and Corporate Governance

6. Ethicists feel that passively allowing something wrong to happen and causing the wrong to happen are ___________ 7. Three important criteria of ‘moral standards’ are ___________ 8. Three distinct standards that guide, shape and control our behaviour in the society are ___________ 9. Moral philosophers have suggested five sources of ‘ethical standards’. These are ___________ 10. Ethical dilemmas are ___________ 11. Different sources of ethical dilemmas are ___________ 12. Good ethical decision-making requires ___________ 13. Law treats the business as ___________ 14. Most aspects of ethics and moral behaviour in business arise from ___________ 15. The aim of ethics in business is to create a deeper understanding of ___________

Review Questions 1. Why would you consider the study of ethics important for today’s business practices? Give examples of five areas of business operations where ethical practices play dominant roles in the success of the business. 2. What is the difference between law and ethics? Illustrate with the example of a situation wherein abiding by the law would not be adequate to protect the interest of the society or an individual. 3. Define ‘morality’ and ‘moral standards’.What are the characteristics of moral standards? Why it is important to establish moral standards for ethical judgment? 4. Why does moral reasoning of people vary? Discuss the reasons with reference to Kohlberg’s theory of development of moral understanding (from childhood to maturity). Discuss the purpose of moral reasoning in ethical studies. 5. Discuss the stages of moral reasoning to establish any violation of moral responsibility. Illustrate your answer with reference to an example of known violation of moral responsibility in a society or in a business place. 6. Discuss the principles of establishing moral responsibility for an act either by commission or by omission. When can moral responsibility be totally mitigated to a person? 7. Establish the moral responsibility of an engineer working for a contract firm executing a highway bridge that collapsed prematurely, wounding five workmen on site. (Assume that the conditions or reasons for this failure are poor quality of raw materials and failure to adhere to standard methods of construction). 8. In view of the fact that ‘business as such has no sense or feelings of its own’, discuss the roles of management in ensuring that employees behave as per established ethical norms and responsibility. 9. ‘Many ethicists feel that passively allowing something wrong to happen and causing the wrong to happen are no different’. Critically comment on this stand as per your own views. Illustrate your answer. 10. Critically discuss the following extract (taken from The Moral Life: What’s In It for Me by Thomas I. White) on a discussion about ethics: vide, accessed on 18 February 2010 “The most frequently told joke about business is probably that the term ‘business ethics’ is an oxymoron. Few people who use this one-liner actually mean that business is a fundamentally unethical enterprise; but the remark does reveal major tensions between business and moral lives—tensions as disturbing as they are important.There is one way, after all, where ‘business’ and ‘ethics’ do not necessarily go together. Succeeding in business is largely about advancing our own private interests—aggressively competing against others, beating them for the same prize, and having unlimited ambition for money, position and power. Moral life, by contrast, focuses on our duties to others—not on hurting anyone (deliberately or accidentally)—to place others’ interests ahead of our own when it is called for, and to always treat others with the dignity and respect they deserve.Yet, being scrupulously honest and caring in our business dealings with others can

Introduction to Ethics and its Applications in Business

11. 12.

13. 14. 15.

unethical behaviour can even cost us our jobs. When taken too far in business, even healthy self-interest, competitiveness and ambition can turn into selfishness, aggression and greed—traits that are clearly at odds with living the moral life. It seems, then, that taking ethics seriously in business extracts a price and may make success more difficult to come by. But, if this is true, why should any of us make the effort to do what’s right? In particular, what would we say to someone who asks, ‘Why should I be ethical? What’s in it for me?’” Discuss the sources of ethical dilemmas and the method of resolving the same. Give three examples of ethical dilemmas that you might have come across in your social or work life. Why ethical decision-making is difficult? Analyse the steps of ethical decision-making discussed in this chapter, identify the shortcomings and suggest some modifications based on your understanding of moral standards and ethical behaviour. Critically discuss the role and scope of ethics in business. Do you agree with some moral philosophers’ view that business and ethics are at odds and in contradiction with each other? Briefly discuss: How business, being an organisation that cannot have any feelings to understand the effects if its actions, can be held responsible for violation of ethics? How law treats the business? ‘Ethical issues in business arise from a business’s purposes and operations.’ Discuss the importance of this approach in the methods of logical reasoning to establish whether an action has been ethical. Does this approach contradict the purpose of ethics in business?

Further/Suggested Reading 1. 2. 3. 4. 5.

Business Ethics—Concepts and Cases; Manuel G.Velasquez, Pearson Education, Delhi, 2002 Business Ethics (3rd edition); Richard T. DeGeorge, Macmillan Publishing Co., New York, 1990 A Pragmatic Approach to Business Ethics; Alex C. Michales, Sage Publications, 1995 The Theory of Morality; Alan Donagan, University of Chicago Press, Chicago, 1977 Methods of Ethics (7th edition); Henry Sidgwick, University of Chicago Press, Chicago, 1962

CHAPTER 2 Chapter Objectives

Principles of Ethics To introduce the concepts of rights, duty, justice, fairness and care as guiding principles of ethics To discuss the principles of moral theories with specific reference to the ‘utilitarian’ theory and approach to ethics To understand ‘rights’ and ‘duties’ in ethics To understand ‘justice’, ‘fairness’ and ‘care’ in ethics To elaborate on how to judge morality and ethics of actions

Principles of Ethics

INTRODUCTION ance ern ce Gov ernan ate Gov nance por Cor orate over nce and Corp ate G erna s ov d nce or nes usi ess an Corp ate G erna B or n d p in Gov usi an ics B ness nd Cor orate Eth ics in usi orp sa Eth s in B usines and C ic s B Eth ics in usines th B E s in ic Eth

1, and http://content., accessed on 15 November 2011 2 http://www.fredericksburg. com/News/FLS/2009/022009/02052009/443905, accessed on 15 November 2011

Ethics in Business and Corporate Governance

The outcome of the study across Indian cities (refer to Case I)—in the backdrop of the Satyam Computer scandal (cited earlier in this book)—could shock the investing public and the regulators of business in India. It reflects serious lacunae in the ethical principles of people working in Indian business. Lack of honesty and ethics at work is, therefore, seriously challenging the very purpose of business in our country. Business cannot aim only at making money for a few individuals; it must lead to social well-being, national economic growth, and fair distribution of benefits to all stakeholders. Take how inconsiderate the senior executives of one of the world’s most developed economies can be (refer to Case II). Even when the very survival of their businesses was owing to taxpayers’ money (i.e., public money), they had neither the morality to check their greed nor the moral responsibility towards the nation and the general public (taxpayers). These executives so lacked in ethics that they saw no wrong in rewarding themselves unfairly even for their highly irresponsible acts—leading to the near-collapse of the companies they managed and, in turn, to global financial meltdown in 2008. Availing huge bailouts facilitated by the US government, they resorted to regulatory loopholes to unfairly reward themselves (for their failures), using taxpayers’ money, which is highly immoral, unfair and unjust. Both these cases are not old; they reflect the present—most recent—state of ethics in the world of business. While Case I manifests lack of ethics and ethical values in the working population of cities, Case II illustrates poor morals and moral values of even senior executives of one of the world’s most developed economies.The concept of doing business without morality, fairness and sense of duties, care and justice can only lead to more such Enron-and-Satyamlike affairs. It is therefore critical to understand ethical principles, as they apply to business and people, for the sustenance and welfare of business as institution for economic growth. While we have already discussed (in Chapter 1) the concepts and approaches of ethics in business, this chapter deals with principles of ethics, namely: rights, duty, justice, fairness and care. Here, the aim is to introduce individuals to the elements and principles of ethics with a view to make them aware of the tasks and responsibility in their professional discharge of duties.

2.1 INTRODUCTION TO ETHICAL PRINCIPLES Generally, ethics and the ethical justification of an action are judged by the morality of that action arrived at by adequate moral reasoning. Ethics, as a discipline, examine an individual’s moral standards or the moral standards of a society, business, institution, etc.; how the standards of these actions influence the lives and living of others; and whether these standards, exhibited by individuals, are reasonable or unreasonable. In turn, the reasonableness or unreasonableness of actions is established by examining if they are supported by good and moral reasons or not. In the case of pesticides found in the bottled drinks in India (refer to Chapter 1, footnote 3a), the debate was not about the concerned company doing business in India, but about the morality of carrying on with that business without correcting the quality of a product that was consumed even by children. Fairness of business demands that, to make or market products for children—who may be unable to judge or say if a product is good or bad for their

Principles of Ethics

health—extra measures are taken to ensure freedom from harmful effects, notwithstanding the legal provisions of the land. Therefore, such business would be deemed unreasonable and immoral if the company goes ahead with the marketing of the debated product without taking corrective actions. Reasons like ‘quality of water used’ to make the product, or ‘cost of correction’ eating into the profit margin, etc. cannot be accepted as reasonable and moral. The company is duty-bound to care for its consumers and to be fair and just in business. Hence, the company’s business philosophy does not stand the test of ethics.

However, the subject matter of judging ethics in business, where decisions are taken by individuals—making the process vulnerable to human follies and moral standards—is more complex. It is not only the reasonableness of an action and moral reasoning, but also the fairness, virtue (morality) and justification of an action that would determine ethics in business. In supporting and revealing goodness or badness of actions, respectively, one has to examine the case deeper to understand few more dimensions of ethics, namely utility, rights, duties, justice, fairness and care. These aspects form the foundation of ethical principles, which are universally applicable. An individual working for a business as well as the business organisation—as an ‘entity’ by itself—has to demonstrate these characters of ethics. Therefore, the concept and application of ethics in business are embedded in the inherent concepts of rights, duty, care, justice and fairness (Figure 2.1).

Rights & duties



Foundation of ethical principles



Figure 2.1 Foundation of Ethical Principles

Most of the issues about ethics and moral behaviour in business arise from the concept of rights, duties, justice and fairness in dealing with different stakeholders. These dealings can be with the employees, customers, dealers, suppliers, the government, a local body or even with the people affected by the business. If a company does not pay fair wages to employees, the employees feel that they are being discriminated or exploited. If the senior executives get disproportionately higher and unjustifiable remuneration than the others in the company, then

Ethics in Business and Corporate Governance

general employees feel differentiated and deprived. If a company fails to adequately compensate an accident victim (injured while at work), the employees feel it is not doing its duty. If an employee’s service is terminated without allowing him to defend his action, he feels that his right to defend has been denied. If a sincere worker, who has served the company for many years, is not offered help during his long illness, he may feel uncared for. These are simple illustrations from what we encounter frequently in workplace, but here underlies the basic elements of ethics—fairness, justice, duty and care. When these are denied, we feel aggrieved. Hence, these basic principles of ethics must be examined to determine if an action or decision has been ethical. The rule to judge ethics—in the perspective of elemental ethical principles—applies to everybody’s action be it an individual, a business, an institution or government. A case in point would be the government acquisition of lands to set up industries, as elaborated here. (This case is coming up for discussion time and again because of its importance in our contemporary society where people are now feeling morally empowered by their rights over land, and such feelings are giving rise to important ethical debates all over the country. Hence, the case may be referred repeatedly to illustrate various points and principles of ethics). In a recent case, the government of a state sought to acquire a huge plot of contiguous land, in an essentially agricultural area, by promulgating the much outlived Land Acquisition Act of 1894 (Chapter 1, footnote 5). Often, areas thus earmarked have many dwelling units and include some agricultural land. But in this case, people owning the to-be-acquired land not only earned their living from it they had also been living there since generations. Neither educated nor trained, they could not take up industrial jobs to start a new way of life. They feared that losing their land would also mean the loss of livelihood; they would be displaced and lose recognition in a basically agrarian society. Naturally they were reluctant to give away their valuable land, most of which had been passed down for generations. Yet, the government required the land area to promote industrialisation—which has the potential to generate employment for the people of that state in general. A prominent industrialist had chosen that site for a prestigious automobile manufacturing facility with the promise of large investments. The state government, being very keen on such investments, decided to go ahead with the acquisition despite having oppositions from the farmers and landowners. The government was ready to pay a reasonable sum as compensation—100 per cent more than the then market value, but the people were still not ready to part with their land. Administrative machinery was put in place to convince or coerce the people to give up their land voluntarily! Soon, pressure groups for and against the land acquisition began campaigning as per respective allegiance and interests. Finally, the situation went out of control of the people of the area and became a fight between political groups. Taking advantage of this situation and the helplessness of people, the government machinery entrusted with the acquisition task, moved quickly to barricade the marked areas of land and forcibly acquired it by promulgation of law. Note: This is a part representation of the case to keep our focus on the discussion of ethical principles.

In such a situation, has the Government been ethical and morally justified to take over the land? Legally, it has the power to acquire land as per the prevailing Act of 1894 (which is an

Principles of Ethics

archaic law with vaguely described conditions for acquisition), but the problem lies in the ethical justification of such actions. If this taking over can be justified through adherence to the basic characters of ethics, then the government’s action could be judged ethical. Industrialisation, one may argue, is necessary in a state to create employment and wealth; it benefits a large crosssection of population. And, for the purpose of industrialisation vast stretch of land are required. Since self-interest groups would defend the acquisition deal so as to attain better bargaining positions, the government is acting within its rights to offer reasonable monetary compensation and take over the land for public utility. It may also be argued that this is morally correct, because the action would serve the greater interest of the community. However, on the other hand, it is the duty of the state to look after and protect the interest of every citizen, especially the weaker section of people—to which, in this case, most agricultural people belong to. The government cannot deprive or force a group of people to give up something they have legally inherited and own in order to create employment and wealth for others. This is not justice to their cause. The government must not act against the will of people and leave them displaced, disdained and uncared for. If it follows the provisions of law, acquires the farmland by for even reasonable compensation and forgets about the future of the affected people, the government would not be fair and just, especially under the circumstances where one of the duties of the state is to protect the interests of its citizen. These two lines of arguments clearly bring out the conflict between law and ethics (in terms of moral dealing). Even within the domain of ethical principles, the consideration of utility supports government action. So, how do we judge the ethicality of this action or make the action ethically acceptable to all? In such a complex situation, a more balanced view is likely if we delve into the philosophy behind the workings of ethical principles (rights, duties, justice, fairness and care). Here, applying the principles, the government may be required to act based on good reasons, justification and utility of the land with minimum damage to the interests of the affected people—and with a sense of duty and care for the affected people—to ensure their future well-being. Law alone cannot offer a just and fair solution to such sensitive problems; it has to be the collaborative and supportive approach of ethics along with law to arrive at a balanced solution that is acceptable to all. Only ethical principles—along with our sensitivity to rights and duties—can provide a fair and equitable solution to such socio-economic problems. The study of business ethics, therefore, must examine how to determine whether an act is moral, right, just and fair. While the term ‘moral’ simultaneously incorporates ‘utility’ of an action in the greater interest of the people, ‘fairness’ is closely associated with care, which is also an important issue to decide if an action or decision is ethical.


Moral Theories

There are four basic types of moral theories in ethical practices. They are the utilitarian theory; the theory of rights and duties; the theory of justice; and the ethics of care (Figure 2.2). 1. The utilitarian theory is broadly based on the view that any action or policy should be evaluated on the basis of benefits and costs it will impose on the society.Therefore, the basic approach of this theory is that plans, programmes and actions of any organisation should be chosen to produce the greatest net benefits for the largest number of people

Ethics in Business and Corporate Governance Moral Theories

The Utilitarian Theory

The Theory of Rights and Duties

The Theory of Justice

The Ethics of Care

Figure 2.2 Types of Moral Theories in Ethical Practice

associated with the business—which includes the society. To determine net benefits, all the costs and benefits (or damages)—be it financial or otherwise—should be taken into account. This approach of utilitarian theory is to expand the scope of ethics and to safeguard the society so that it does not suffer due to any partial analysis of cost and benefit. For example, setting up a green-field industry at the cost of the environment may be justified by choosing and considering the returns-on-investments, along with employment generation and wealth creation, but, if one considers the dreadful effect of global warming due to such damage to and depletion of the environment, then the net benefit may not justify the action—especially if, as in most cases, the project involves large-scale destruction of the environment. 2. The theory of rights and duties holds that all people have some basic rights, concerned with the power of an individual to choose, pursue and protect his or her interests, and all such rights are associated with correlated duties. When these rights arise from legal provision or social convention, they become moral rights. If a company prohibits or denies such rights to its employees (either through company rules or by discrete action), it may be said to be unfair to its employees and its action would not be adjudged moral. For example, an employee has the moral right to be rewarded (financially or otherwise) for an invention of his, one that has led to patents and benefits for the company’s business. But, if the company denies him any benefit (howsoever nominal) on the grounds that the inventor was only performing his duty, then it would be unjust and unfair. Similarly, it is the right of a customer to get the exact product for which he has paid for; or it is the right of a supplier to get payment against his bill as the terms of contract. The correlated duties, in the latter cases, would be: paying the right price at the right time and supplying the correct material on schedule, respectively. The theories of utility, rights, duties and justice (to be discussed in this chapter) are the polar direction to judge the morality of a decision. This necessitates that any action of a company, group or body (institution, association, government, etc.) should be judged by ‘moral reasoning’ under the aforesaid moral theories. Any bias, unfairness or extra-influential behaviour would be seen as unethical. For example, no person can be forced—against his will, interest or benefit—to do a work that he does not want to do, or which is not a part of his social or legal duty. Similarly, no minor can be engaged in factory-work—even with his consent—because child labour laws prohibit any such engagement, making it illegal and immoral. As such, the contractual rights of a company imply that it can forcefully

Principles of Ethics

engage neither an employee in any activity without consideration to his wish, skill, interest and hazards of the job, nor can it hire a minor or physically challenged person to do a job which the law does not permit. Such engagements cannot be morally justified going by the moral logic. Moral theories also offers employees the rights to refuse a job if it does not conform to moral standards and professional ethics, even if he or she has agreed to abide by the (service) rules of the company that carry the ‘non-refusal’ clause. 3. The theory of justice revolves around the fundamental principles to guarantee a just and morally acceptable decision. It implies that the actions are guided by fairness, equity and impartiality (vide discussion on justice later in this chapter). 4. The ethics of care refers to necessity of showing extra care and consideration to protect someone else from the adverse effect of one’s choice (and no one else’s) that can make someone vulnerable in a particular situation. Ethics of care necessitates examining contextual details of the situation in order to safeguard and promote specific interests of those involved because they are interdependent for accomplishing their specific interests —as long as the interests are moral and legal. The moral theory of rights, duties and care and the theory of justice together form the principles of ethics in business, necessitating an understanding of each in the conduct of business. The issues of utility, rights and duties, care and justice are considered to be the basic norms for establishing whether an action or a policy can be termed ethical. The basic criterion of these issues will be discussed as we proceed with this chapter.

2.2 UTILITARIAN APPROACH TO ETHICS Jeremy Bentham, the founder of ‘utilitarianism’, sought an objective basis to make value judgments that would provide the public and society a fair and acceptable method of determining what is right and just. The utilitarian approach works on the principle of utility or benefit of an action, and tries to optimise the benefits to all constituents of the society. Though this approach was initially developed to arrive at fair and just agreements and decisions—by looking into beneficial and harmful consequences of various policies that a legislator or society can enact or introduce —it now finds wide applications in many business decisions and actions as well. Basically, the utilitarian approach advocates that, if an action produces greatest benefits to the maximum number of people, the action or decision should be considered morally right. According to the utilitarian theory, ‘An action is right from an ethical point of view if and only sum total of utilities produced by that act is greater than the sum total of utilities produced by any other act the agent could have performed in its place’. Proponents of utilitarianism have further expanded this basic approach to incorporate the following: inclusiveness of all stakeholders, net-benefit concept, and consideration of alternatives that produce the greatest sum total of utility. Inclusion of these features in the assessment of ‘utility’ adds great value and sense of justice to this theory. Let us illustrate this point further:

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To review a case cited earlier—land acquisition for industry by the government—in consideration of the provisions of the utilitarian principle, the government may argue that its actions would bring about great utility of that land, and maximum benefit for a large number of people in that locality, compared to conventional agriculture or any other form of utilisation of the land. Hence, the action is the right course from the ethical point of view. The question that may arise would be: If an action produces most utility, is it always moral? The government can further examine—using the utility approach—whether the sum total of the utilities produced by setting up a specific industry is greater than utilities that could be produced by using that land in any other way. Of the several possibilities, only that action is right whose overall (sum total) benefits are the greatest for all concerned—in comparison to other possible actions or alternatives. This will require the government to: (a) Quantitatively assess the resultant utility, which, in such cases, is not very straightforward to calculate or estimate; (b) Examine other alternatives through which the same objective (to set up industry in the state) could be accomplished; and (c) Justify that the chosen action is right because it would produce the greatest benefit to all concerned and outweigh all visible and invisible costs. The utilitarian theory also implies that an action is moral and right only if it produces the most utility for all persons concerned—including those who are affected by it and the performer of that action. The principle thus includes all stakeholders in the process of determining utility, which is a very important aspect of the utilitarian approach to justice as it calls for a system of inclusive growth of a society or nation—a view recommended by most economists in order to achieve real growth and sustainable well being of the nation. Hence, for the government’s action (land acquisition) to be moral and right, it must be proved that it would produce the most utility and benefit for all concerned, namely the state, people of the state, locality, society and others (farmers) who would be losing their land due to the government’s action. The utilitarian principle also states that an action is right as long as its benefits outweigh the costs. This means that benefits considered should not be immediate or near-term in nature; they must consider the cost in terms of both immediate and foreseeable futures, as well as the benefits that each alternative action pertaining to the matter can produce for each affected individual, and the significant side effects (if any) of that action. If we analyse the land acquisition case from the utilitarian viewpoint, then it can be justified by establishing that the particular action of acquisition for the industrial purpose at the said location would be more beneficial to all the stakeholders than any other way of utilising the land. For the same, a cost-benefit analysis would have to be prepared and presented, in most transparent manner, to the stakeholders. Furthermore, the analysis should not be limited to near-term benefits and must consider that the land-losers or affected people stand to gain in the long term. For the latter, it would be necessary to examine if the lives, livelihood and social environment of the land-losers’ can be protected and assured in the long run (say, 15 to 20 years from the time of acquiring their land and displacing them).

Thus, the government or the industry (responsible for acquiring the land) should examine utility, alternatives, inclusiveness of benefits and gains, and the total cost (to arrive at the total cost, the benefits and costs of actions affecting the parties involved in the deal are to be measured on

Principles of Ethics

a common numerical scale and then examined for arriving at a truly beneficial action) incurred by either party in the deal. Judgement about the acquisition—whether it is ‘right’ from the ethical point of view—can only be made after a detailed examination of these parameters. No doubt, in such cases, it is difficult to correctly assess future losses (of those who have lost their land) and impact of any change in livelihood (due to social and environmental changes). In view of these interpretations of the utilitarian theory, we examine those aspects of the deal or action that help in judging its morality and rightness from the ethical standpoint: (i) To find or determine the alternatives available to the doer of an action of a given situation. For example, in the case of land acquisition, the government may have three alternatives: to acquire the land by enforcing law, to shift the industry to a non-agricultural/barren area of that district or state, and, to compensate the persons concerned with immediate and long-term benefits that outweigh the cost of losing their land, as well as to consider the side-effects that may precipitate due to consequent industrialisation. (ii) To estimate direct and indirect benefits and costs of the deal or action for each alternative, and examine how it benefits or affects each person concerned in the short-term as well as long-term. In the case of land acquisition, this would mean: calculating the cost of ensuring livelihood to all affected persons and their family members, indexing the price escalation of living cost for the future, cost of acquisition with the projected rate of inflation and market value of the property in terms of a projected (future) time period, and the plan of mitigating the side effects of industrialisation on the society and its people. In this case, for that matter, the alternative would mean shifting the industry to a less populated and non-farming area. (iii) To choose a particular alternative which produces the greatest benefits and utility to the maximum number of people (affected by the action), and is also morally and ethically appropriate as per the rules of moral reasoning. The utilitarian principle of judging ethics and morality is in sync with many industrial, institutional or government and public sector activities. Land acquisition has been one example, the principle can be equally applied to many other areas of decision-making in the industry. For example, fund allocation in a government budget—here, the fact that infrastructure (highways, ports, etc.) are allocated higher funds compared to other areas of government spending, can be justified on the basis of the utilitarian principle. Because such developments bring about the greatest benefits to all the citizens in the country—investments, businesses, transport, communication, etc.—and are extremely necessary for the growth of the economy and modern society. The utilitarian principle is equally applicable to decision-making and regular administration in business, e.g. formulating company policies for reward and punishment, incentives, common services (facilities), social and environment policy, etc. For example, if a company wishes to merge one of its loss-making units with one that is consistently making profits, the utilitarian principle would require the company to examine: whether the merger will bring greater benefits to all stockholders, loss and gain of all employees before and after the merger, cost-benefit analysis with long-term perspective in view for greater benefits to all, fairness to debtors and other investors, etc. Similarly, the utilitarian principle can be used to affix production incentive bonus to workers for improving productivity in a machine shop. If the

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cut-off level to qualify for bonus is too high— i.e., if most workers are unable to reach that level through honest and sincere efforts—then the scheme may not yield the expected improvement in productivity and will benefit only a few. In fact, in many instances, such restrictions result in ‘negative utility’. Yet, by working out a cost-benefit analysis, considering greater benefit to greater number of people, the cut-off level can be kept within the reach of most workers, thus turning the same incentive policy into ‘positive utility’.The objective of the utilitarian approach is to arrive at a decision or action by considering both the alternatives and the net-cost concept for greater benefits to greater number of people (or, in other words, minimise losses for all). The utilitarian principle is quite popular in society; it fits well with our way of living and making intuitive judgements. We commonly cite explanations about why we view or judge some acts as morally wrong or morally right in the society. For example, we say that stealing is morally wrong because such practices harm the society; dishonesty is immoral because it harms the interests of a business; etc.. In fact, honesty, integrity, truthfulness, faithfulness, etc., in business or in society, are all based on the utilitarian view in order to improve the utility of people or to make them behave in a manner that does not harm the interests of others. The utilitarian approach is so versatile in that we also try to justify our individual actions or preferences via utility. For instance, a person unwilling to donate money to a roadside charity may justify that such donation has limited scope and may not benefit those who are really needy, but if he were to donate to an NGO working in the area of poverty alleviation then that would benefit a larger number of needy people. Similarly, a company may refuse to donate money to a political party, because that would not benefit people at large; instead, it would be morally right in making a donation to a philanthropic society engaged in some social upliftment of a larger cross-section of society.Yet, the most striking effect of the utilitarian view pertains to economic issues, with which it attempts to maximise benefits for its stakeholders. Consider the practices of discount or volume discount that companies offer at regular intervals. Many hold the view that if the same goods are sold at cheaper rates during such sales campaigns, then charging higher value at other times is not morally justified; while others justify such discounts with the argument that it benefits customers (lower price), business inventories (release of money locked in finished goods for further productive use), as well as companies (produce more to replenish the stock in the market and thereby improving the scope of employee wages).Thus, selling at a discount is often justified by the creation of greater utility of resources and benefits for all concerned. A company can similarly attempt to justify lower increments offered to its employees or low dividends to its shareholders in view of the necessity to reinvest the surplus money in a new project for the long-term benefit of all—the company, its employees and its stakeholders. In this way, the utilitarian theory throws light on the rationale behind a decision that may affect others’ interests and, in turn, on the elements of ethics involved in such decision-making or dealings. In application, this theory can be used to make decisions regarding resource allocation in a company for maximum utility, or expenditure control by a government, or other matters that call for appropriateness of actions or policies so as to provide utmost benefit to people and society at the least cost. In India, too, economists use the utilitarian viewpoint to justify various government subsidies for commodities like fertilisers, oils, seeds, grains, etc.—which cost the exchequer a huge sum of the taxpayers’ money.

Principles of Ethics

According to them, the subsidy is justified as it enables these sectors to become economically viable to support a large part of country’s population that depends only on agriculture for livelihood.The aim of the utilitarian principle is to examine such issues in order to gain maximum utility of resources by benefiting maximum number of people, without causing any loss or harm to society (the affected people) or environment (associated with industrial activities). However, the principle of utility should not be overstretched to exploit the opportunity for maximum benefit; the utilitarian principle should retain the spirit of ‘net-cost’ or ‘net-benefit’ to society. Many social, political or business actions that we tend to justify via utility may not be justifiable if we were to consider the long-term ‘net-cost’, because the bias or overzealousness behind such decisions overlooks other alternatives that would bring similar benefits. Clearly summarising the consequences of such biased actions, Aldo Leopold warned:‘Having to squeeze the last drop of utility out of the land has the same desperate finality as having to chop up the furniture to keep warm’. As the utilitarian approach involves an estimation of cost-and-benefit, the process of judging or justifying often involves measuring the outcome. While this is possible for benefits related to productive or economic output, it is difficult in case of health or life or social ills. For example, the effect of incremental damage to the environment on society and the health of people will be difficult to assess. Similarly, the discovery of a drug for a particular disease may be beneficial to public at large, but the clinical trails involved therein and their effects on human beings may be difficult to measure. Here, ethics demand that utmost care and consideration is exercised in all clinical trials necessary during research and development of new drugs so as to prevent harm or side-effects on humans—otherwise the trial would be immoral and unethical. It is also genuinely difficult to measure or estimate values and benefits in many areas of society that are linked with business. For example, how does one assign value to life when it comes to insurance cover? In awarding compensation for loss of life due to an accident, companies or government or the court of law assign value based on status and income of the deceased prior to his or her death. But is the price fair? Is it not morally inappropriate to put a price on life itself? Thus, when it comes to measuring ‘net-benefit’ especially in areas of social benefits and human life, there are some inherent difficulties in this popular approach to determine the ethics of an act or decision. Nonetheless, the utilitarian approach has been recognised by most sociologists and economists as a valuable tool to guide and influence decisions in many complex social and business matters. Many economists argue that this approach is at the root of human behaviour to maximise their utility. Such consciousness of utility in human approach to capital and commodities let them fix the price that they are willing to pay, and, thereby, influence the supply-demand curves of sellers and buyers in the market, especially in the competitive market. However, it should be remembered that the utilitarian principle does not only deal with the question of greatest benefits accrued of all alternatives, but also talks about benefits to all affected persons as well as the morality and rightness of the chosen alternative. If an alternative action can produce a better net-result but is morally questionable, then that alternative will not stand the test of utility or morality. Thus, the purpose of the utilitarian principle is to help, guide and enable business, institutions, society and the government in taking actions that are morally right and most beneficial to the organisation, its people and the society at large. The utilitarian approach

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—in sync with general beliefs and thought processes of individuals—has been a trendsetter for both justice and utility of resources in society.

2.2.1 Rule-Utilitarian Approach Some critics, however, observe that the utilitarian approach is not always capable of dealing with moral issues simultaneously related to rights and justice. Given the criteria of ‘greatest benefits to all’, this approach may imply an action as morally right when, in reality, it could be violating people’s rights. Take the case of land acquisition, and assume that the government can justify the act with the principle of utilitarianism (all affected people would be most benefited by the acquisition). Such a decision may, therefore, look morally justified, but it simultaneously violates the ‘rights of possession of properties’ by a person. Similarly, the employment of child labour as domestic help may bring more utility and benefit to both the household and the parents of the child, but it cannot be morally justified in modern civilised society. Another case in this regard, common in industries facing recession, is downsizing. Companies justify such lay-offs by reasoning that it would help cut costs as well as to save the jobs of other workers. Such an act may be justified with reference to greater benefits to many others involved, but it also violates justice to those who lose jobs at a time when the economy is already bad. Thus, the utilitarian approach may sometimes lead to paradoxical situations wherein actions violate rights or moral standards and offend justice. Therefore, to deal with such situations, experts propose an alternative to utilitarianism—called ‘rule-utilitarianism’. This ‘rule of analysis of utility’ prescribes that, in order to determine if an action is ethical, one should not only consider the greatest utility, but also consider if the action is required as per the correct moral rules that everyone should follow, including the self. And, if an action (or alternative action) is justifiable from this point of view, only then should it be considered as ethical. Which brings us to the next question: What are correct moral rules? Rule-utilitarian prescribes that an action should be judged in both contexts—‘maximising utility’ and ‘correct moral rules’—and not in isolation of each other. Thus, there are two aspects to determining correct moral rules: (1) To examine what would be most beneficial to all those affected by the decision; and (2) To understand if that is the correct moral rule.These qualitative aspects of rule-utilitarian principle can be stated as: 1. An action is right from an ethical point of view if and only if the action would be required by those moral rules that are correct; and 2. A moral rule is correct if and only if the sum total of utilities produced, when everyone were to follow that rule, is greater than the sum total of utilities produced by following some alternative rule. This implies that an action, which maximises utility in a particular situation, may not necessarily be right from an ethical point of view. For example, while applying rule-utilitarianism to the case of land acquisition, one may show that the act would produce sum total of utilities greater than any other alternative for everyone concerned. But from the ethical standpoint it would be difficult to establish that the action is required by the correct moral rules, because, it would displace many elderly people, making it difficult for them to adapt to an alien environment at a late stage in their lives, and cause them uncertainty and hardships. The act may also bring about new social and economical problems for them in the face of fraud, feud, forcible eviction,

Principles of Ethics

emotional and psychological disturbances, etc. Correct moral rules cannot support any activity that create or aggravate the sufferings of large number of people, which cannot be compensated by financial benefits alone. Perhaps, the public movement against the construction of a dam on the Narmada river (in India) and, in doing so, displacing a large number of villages and villagers, can be justified from the rule-utilitarianism angle. Assumptions of business or government institutions that offer financial compensation to those displaced may provide the moral ground to justify their actions. But thus affecting the life and living of others cannot always be justified by the ‘correct moral rule’ provision of rule-utilitarianism. The spirit of either utilitarian or rule-utilitarian theory is to prevent injustice and violation of rights taking place in the guise of ‘maximum benefit to all’. In this context, it should be noted that not all results produced by an action can be measured by economic value; there will always be some moral issues and losses that are not measurable in normal course. For example, the working conditions in some industries (mining, electroplating, leather processing, etc.) are hazardous to health. Some companies provide a special concession—milk allowance or hazard allowance—to each employee engaged in such jobs, apparently to mitigate suffering born of the hazardous environment. Such actions benefit all concerned—the management, workers, customers. The management incurs lesser cost compared to the huge expenditure on equipment that would otherwise extract fumes and dust from the workplace; the buyers get raw material at lower costs; the workers earn more; and the public can buy the end-products at relatively lower prices. But, is it moral and ethical to expose the workers to the toxic fumes and chemicals that may cause permanent damage to their health? Arguing from the utilitarian point of view, one may say that the action of providing special allowance for hazardous jobs produces maximum benefits to maximum number of parties involved in the chain of business process; hence, it is justified and there is nothing wrong with it.Yet, the rule of moral correctness does not support the action as being right. Hence, rule-utilitarianism modifies the correctness of decisions over utilitarianism. There are many such examples in business operations, including marketing, where companies tend to be guided by the theory of maximum benefits to maximum number of people, but such actions may not always be just as per the rules of moral correctness. Consider the sale of ‘over-the-counter’ drugs in our country, which are indiscriminately sold to the public irrespective of whether they really need them. These drugs are generally made of various over-dosed harmful ingredients that have unfavourable side-effects on human body. Furthermore, there is no control of usage in marketing such drugs ‘over-the-counter’ and this can lead to serious health problems that cannot be justified by the rule of moral correctness. Thus, such methods of reasoning suffer from two limitations: (1) the utilitarian approach is difficult to apply when dealing with values that are difficult to measure (or estimate) in order to determine the maximum benefits to all affected persons. For example: health hazards, moral hazards, emotional disturbances, sentimental upsets, etc.; and (2) this approach seems inadequate while handling situations that involve rights and justice. In fact, it is the latter limitation that gave rise to the rule-utilitarian approach, so as to partly correct the situation involving intricate moral issues in the choice of actions. Another approach of ethics is to judge an action by the principle of common good. Many consider this principle as an extension of the utilitarian approach. Hence, we need to discuss the

Ethics in Business and Corporate Governance

principle of common good approach for complete understanding of the utilitarian and common good approaches to ethical issues before proceeding to other traditional ethical principles.

2.2.2 The Common Good Approach in Ethics The common good is a term that describes a ‘specific good’ that is shared and beneficial for most people in a society or for members of a community or locality. The Catholic churches, which are said to be the pioneers in promoting the concept of ‘common good’ approach, defined it as ‘the sum of those conditions of social life that allow social groups and their individual members relatively thorough and ready access to their own fulfilment’. Common aim of the ‘common good’ aspect of ethics is to benefit all individuals in the society or a group and to make the society sustainable. Many ethicists consider it to be a part of the ‘utilitarian’ ideal, representing ‘the greatest possible good for the greatest possible number of people’. For instance, as per the rule-utilitarian approach, ‘a moral rule is correct if and only if the sum total of the utilities produced, when everyone were to follow that rule, is greater than the sum total of the utilities produced by following some alternative rule’. This approach is very close to the spirit of the common good approach that advocates benefit for most people by the application of a rule or decision that may even entail some sacrifice by a few in the society. According to this view, the common good is a complementary approach to the ‘utilitarian principle’ for solving ethical issues dealing with values, damages or benefits, which are difficult to measure or estimate, in order to determine the maximum possible benefits to the maximum possible number of people concerned in the society or in a group. The common good should have some reference criteria as to what specific good we are talking about. ‘Specific good’ that is talked about in the parlance of common good generally refers to basic rights of individuals in the society; and fulfilment of some basic requirements of individuals in the society, namely food, water, shelter, environment, health and dignity that enable the society to better the quality of life and living. These elements of basic rights are necessary for sustainability of a community.The common good approach to actions and decisions requires that we pay attention not just to our individual good but also to the common conditions that are important for the welfare of the society.Thus, the common good approach has the reciprocal obligation for the individuals in a society to consider the ‘interests of the society’ first before their ‘personal or private interests’. People should be ready to accept modest sacrifices for a common good in a society. A person is not important while making decisions about the common good; it is the society or a large group of people whose benefits or protection should be the guiding criteria. However, there is no uniform definition of the common good for each situation because it may change from society to society, locality to locality, and also as per the perception of people about what is good and what is bad. But, despite this flexibility, this bit of ethics—the common good approach—has to focus on the betterment of the society as a whole. John Rawls, the great philosopher, viewed ‘good’ as activity to create a better world that is just, fair and liberal, allowing pursuit of virtue. Thus, the common good concept gets attached to ethics. It represents the philosophy of being moral, virtuous, fair, right and just. The common good, therefore, means to create social systems, institutions, and environments—technical and natural—on which we all can depend to work in a manner that benefits the maximum people and hurts very few. For example, issues

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of protection of natural environment, provision of basic state-supported primary healthcare, free basic primary education and schemes and actions for poverty elimination represent the common good approach in India. A common good decision will be valid only if it helps create such beneficial social environment that is capable of serving the interests of maximum people as against the interests of few. As ethics are not enforceable from outside, the common good is also not enforceable from outside. The implementation of the common good calls for a willingness to cooperate and make some sacrifices for the benefit of a greater number of people. This is the difficult part of this approach, and it arises mostly from the contradictory ways of living in a so-called ‘pluralistic society’. Different people in a society have different ideas about what is ‘good’ or ‘bad’ for us or them.They are not ready to compromise on or sacrifice their ideas.The society is getting further divided on the lines of ‘underprivileged’, ‘minority’, ‘backward class’ and ‘weaker section’, making it difficult to identify direction in which the principle of the common good should work to create a ‘better society’ or what would constitute better society. Hence, ethical decision-making under the common good approach is also dilemmatic. For example, the case of the acquisition of fertile agricultural land for industry (referred to in Chapter 1) had precipitated many differing voices and views as to what should be good for that particular situation, society and locality. The force of the movements that started ‘for and against the land acquisition’ got so strong that the government of India had to think of replacing the old land acquisition law by a new one with more clarity of thinking about the society and the people who could be affected by such actions and how those could be appropriately dealt with (vide ref. 5 and 11). Many believe that this action of the government was primarily guided by the principles of the ‘common good’ approach (and not the utilitarian approach) so that the locality or society is not harmed unnecessarily by the land acquisition. The application of the principle of common good helps us take decisions under such situations where applying other ethical principles might invite controversies. For example, a company wants to spend some money for the development of a locality. Local people come up with different ideas as to what would be good for them as per their perceptions. Some people suggest provision of drinking water, some want improvement in educational facilities, and some other prefer building of roads and infrastructure. These differing views about people’s priorities are natural in a pluralistic society where individuals enjoy the freedom of expression. However, overlooking one group’s views over those of the other group may violate the principle of treating people equally. It may also be construed as not respecting the freedom of expression of those who do not subscribe to a particular priority for the development of the locality.This will cause some ethical dilemmas. Such a situation makes us deeply analyse and reflect over different development priorities expressed by the people and choose the one that would best fulfil the aim of common good. If one chooses drinking water because of its importance in maintaining the health of all, then that would imply sacrifice of others’ views which are also part of the common good approach. However, the common good cannot satisfy all but must benefit the majority of the society members or bring about a major benefit to the society. The latter aspect can be illustrated by an important contemporary issue that shows how the common good approach can be applied for addressing certain issues. The case relates to ‘restricting and

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monitoring the mobile technology services and e-mails in the terrorist-infested areas of the country’. Any such action will be construed as curtailing the freedom of expression and the right to communicate, and also an infringement of the privacy of those who live in the area but are not part of terrorist groups. But, considering the grave consequences of terrorism, the common good approach will justify sacrifices of some interests and rights by the society for the ‘more good’ of the country. There are arguments against the common good approach as well. It is also described as a route to discriminate and deprive an individual from his or her rightful place or benefits. For example, reservations for backward classes in higher education or jobs deny persons belonging to other groups their rights over equal education and job opportunities. This is against some established ethical rules. But, considering the impact of the backwardness of a large group of people on the overall well-being of the society, reservations may be justified.The action of job reservation and the necessity for others to sacrifice a part of their rights and interests would be valid from the common good approach to the issue of backwardness. No doubt, the situations described here demonstrate the complication of deciding what is good under the common good approach, but they simultaneously establish the need for such a rule in the ethical decision-making process for overall social benefits and betterment. The common good approach is, therefore, widely used nowadays in situations where traditional ethical principles cannot offer a clearly satisfactory or non-controversial solution. These traditional ethical principles are: Rights and Duties, Justice, Fairness and Care, and Ethics of Virtues. These will now be discussed in relation to ethical business practices.



Rights and duties are conjoint factors, i.e., every right of a person (or an organisation) is associated with the performance of certain correlated duties. For example, if one has the right to work, one is also duty-bound to observe the rules and regulations of the workplace. Or, for that matter, if one has the right to just remuneration, he or she also has to work with efficiency and commitment.Thus, the concept of rights and duties and their situation-specific analysis are important factors in the understanding of ethics, and in deciding the moral correctness of an action, especially in business dealings and operations.



Rights are of two types, legal and moral. Legal rights are conveyed to a person by the statue of law or the constitution of the nation. For example, freedom of speech, right to vote, right to self-defence, right to own property, right to service under a duly executed contract, etc. are our legal rights. However, legal rights are limited by the jurisdiction within which a person or a business operates. For example, an Indian can cast his or her vote only in the place where he or she lives or works, i.e., voting is jurisdiction-specific. A nation can restrict the right to properties only to its nationals and may not allow other nationals, working in the country, to acquire properties in their names. Similarly, an employee has the right to work under the service contract of an employer, but he has no right to simultaneously

Principles of Ethics

take on another (paid) job at another workplace; he or she is duty-bound to seek the approval or permission of the original employer. Moral rights devolve from social norms and moral standards, and are independent of any legal system. For example, the right to free primary education, right to work, right to basic medical treatment, right to safe drinking water, etc. are our moral rights, but not legal rights —unless they are made legal by the special enactment of a law in the country. Moral rights are also called human rights, because they try to protect the basic human needs of a person in order to survive in society. With the progress of civilisation, the changing outlook of the society, and the realisation of the need to protect the dignity and well-being of human life for the overall welfare of society (i.e., for the greater benefits of the society at large), moral rights now play a major role in shaping the ethical behaviour of both society and business. Given that moral rights are derived from the considerations of humanity and social welfare, they are nearly universal in application. Consider the case of an air-passenger who was stuck at the emigration clearance department of a foreign country due to some clearance or visa related issue. Legal authorities detained him for further questioning and verification, but he could not be denied his moral rights to be treated humanly with dignity and to be provided with food and shelter till the investigation was complete and decisions taken. He also had access to legal services to defend himself. Similarly, a person visiting a foreign country cannot be denied emergency treatment there, although he may not have medical insurance appropriate for that country. On moral ground, the hospital or clinic is supposed to first provide emergency service and then look for how to get reimbursed for the treatment. Similarly, a person wounded in a road accident has the moral right to first get treatment at any nearby hospital or health centre—even if he has no medical insurance.These moral rights are based on humanitarian considerations, and are equally applicable to all by virtue of being human. ‘Rights’ make for a powerful tool that helps an individual, a group or a business to freely choose what to pursue, protect or indulge in for the benefits of the self, society and business— as long as those choices are not illegal, prohibited by law (competent authority) and injurious to others. For example, if the law in a country or a state does not forbid gambling, no one can bar people from willingly participating in a wager—it is their choice to exercise their right to gamble. Those who consider gambling to be harmful to society can organise a protest or run an educational programme to persuade others not to participate in that activity; it is their right to peacefully protest what they do not agree with, but they cannot forcibly stop a willing participant from gambling. Participating in a legal activity by own choice is one’s right. On the other hand, protesting or educating others about something that one considers socially harmful is the right of others in the society. This illustrates how rights can be exercised as ‘checks and balances’ within the society. In the exercise of rights in business, a company may claim its right to engage in any business of profit, but that business must have legal sanction or provision. For example, dealing in spurious drugs, that are injurious and harmful to others, cannot be considered as a right. Rights must have legal or moral sanction, and can accordingly be invoked or revoked under different situations, such as: 1. Rights attained by the absence of law or prohibition. For example, there may be no law prohibiting begging so the action of begging cannot be stopped. However, a municipal

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authority can prohibit beggary on its streets, due to resulting traffic disturbance or distraction leading to higher chances of accidents. Then, begging becomes prohibited and the beggar loses his or her right to beg. Similarly, it may be the right of an employee to move freely within the workplace, but the company can prohibit free access to certain areas of operations (e.g., research and development) or other vital installations —thus limiting the right to free movement for its employees and visitors. This is not considered as violation of rights of the employees or an unethical business practice. 2. Rights that accrue from employment, authorisation or empowerment to do something either to secure the interest of others (such as the employer) or the interest of self or society. For example, a boss’s rights to command his people to do a job, a CEO’s rights to appoint a person to a position, the rights of a person possessing power-of-attorney, the rights of a union leader to negotiate wages on behalf of all employees, etc. In business, these types of rights frequently come into use in the course of performing duty or discharging responsibility. 3. Rights that descend by default. For example, consider the employment conditions of a company that states that locals fulfilling the desired qualifications would get first preference. This would amount to granting rights to people living in a particular area, when those living elsewhere are equally qualified for the same jobs. Similarly, when company rules state that an auditor must be provided all necessary information to carry on with his task, then the auditor is empowered with the rights to call for any information pertaining to the operations of that business. Or, when a company’s rulebook states that all employees shall maintain confidentiality in respect of information and data about its customers, then the company has the right to take disciplinary actions for any violation of the rule or disclosure of customer-data by an employee. 4. Rights that devolve from moral standards and social norms. For example, the right to protest and protect people from cruelty or obscenity is a moral right that devolved from moral standards expected by the people in the society. These examples—except for rights devolving from moral standards and social norms—are mostly concerned with legal rights. As stated earlier, moral rights are independent of any legal system. For example, an employee—who has worked sincerely for over 15 years in a company— meets with an accident in the course of employment and is permanently disabled. He, being the only adult member of the family, seeks that the company employs his wife on moral grounds of sustenance and continuation of education of his minor children.The company, however, is only legally bound to pay suitable compensation as per his service contract or factory laws, and is not bound to employ his wife. The question is: Can the employee demand employment for his wife as a right? The legal answer is ‘no’, he cannot. But he can seek employment for his wife on moral grounds, i.e., as moral rights, provided that has been the norm of the company in the past or is inherent in the moral standards of the local industry. Thus, as far as industries and businesses are concerned, moral rights impose the requirements of doing or pursuing acts that are humanitarian or moral or legal (or prohibit acts that are non-humanitarian) and allow justice and fairness to prevail when dealing with situations. An example of prohibition of moral rights would be the case of suspension or termination of an employee—who has been indulging in unethical activities

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—without allowing him or her a chance to explain or defend. In normal course, it would be morally wrong if the company did not allow the employee to defend his or her action and unilaterally suspended the employee, but if the employee’s offence is of serious nature—such as terrorism, spying, swindling, etc.—then the employee can be suspended without notice. Moral rights have three distinct features that help in understanding their nature and in deciding about the specific performances under the obligation of moral rights. They are: 1. Moral rights are closely interlinked with duties. Generally, the moral rights of a person arise from—or are rooted in—the moral duties of another person or organisation to which the person is linked with owing to a common interest or consequence. For example, in the aforementioned case of a disabled employee seeking employment for his wife, his moral rights are rooted in the moral duty of the management (company) to stand by hardworking and sincere employees at the time of their need. In turn, the sense of moral duty of the management arises—at least partly—from the sense of moral responsibility arising due to the cause of the distress, e.g., the accident that occurred while the employee was doing his duty for the company. Thus, rights and duties are conjoint like the two sides of a coin; they are derived from each other. It is the moral duty of of all employees to think and act for the well-being and prosperity of the company they serve, in order to attain certain specific actions on the part of the employer in accordance with the latter’s moral rights. In other words, by not doing their duties well, employees may lose their moral rights to get some specific actions from the employer even at the time of their distress or need. Here, a very frequently asked question would be: If citizens have the ‘moral right’ to work for a living, then is it the ‘moral duty’ of the state (government) to provide them with jobs? The answer is: Not necessarily; not unless the state or government has enacted laws to that effect (i.e., offered such legal rights to its citizens). In fact, in recognition of this right and duty, many developed countries provide unemployment benefits to job seekers. In this context, it is also the moral responsibility of the state to create sufficient opportunity for its citizens to acquire skills and suitable jobs—which can be achieved by promoting education, training, business, industries, etc. The state is thus duty-bound, by its moral responsibility, to create opportunities for its citizens to work, in fulfilment of their moral right to work. But, such rights also create a reciprocal duty on the part of the citizens to equip themselves with skills necessary for jobs. 2. Moral rights are equally and equitably applied between the concerned parties. In other words, if one has the moral right to pursue an interest or course of action, then that should neither interfere with nor subordinate the moral rights of another person or body. One is free to pursue one’s interest as long it does not subordinate the rights of others—and vice versa. For example, an employee having a genuine reason not to work night-shifts can appeal to the management to make some concession, but he cannot suggest the name of another person to work the night-shift in his place—because that would be morally incorrect. Similarly, a person has the moral rights to seek higher remuneration owing to her own merits, but she cannot cite the example of another person getting a higher salary as her reason for seeking similar treatment—because that may amount to subordination of

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other’s interest. Or, consider the case of a hacker who has the moral rights to pursue this interest in the electronic media (the Internet), but, taking advantage of his moral rights, he cannot hack into another person’s email or bank account—because that would amount to subordination of the interest of others, which is immoral. 3. Moral rights may be used to justify one’s action or for invoking the protection or help of others. Consider the case of eve-teasing in a public place. A person with strong social values may utilise moral rights to object to such act in public, and can attempt to stop the act with the help of police and other people, i.e., he can invoke the help of others to aid him in doing so, with full moral justification. Similarly, in business, an employee has the moral rights to raise objection to a discriminatory or unethical act within the company, and may invoke the help of others or the trade union to stop the same. If he fails to stop such practice despite invoking others’ help, he has the moral right to make it public and seek help of external institutions (e.g. media) with a view to find remedy. This implies that if one has the moral right to do something, then he or she will be morally justified in seeking moral help of others who can help or aid the situation or mitigate the sufferings arising due to some immoral or unethical actions. Moral rights provide the basis for moral judgments on matters relating to individual welfare or well-being and protection of interests and rights. Thus, it is helpful in deciding actions within the scope of industries and business practices employing a large number of people. Utilitarianism, on the other hand, emphasises the need for morality of an action for the greater benefit or utility of the society as a whole. The utilitarian approach protects or promotes the interest of individuals as an entity or a constituent part of the society, but emphasis remains on the society. Moral rights more clearly indicate what is due to an individual from the others in the society or business; protect the individuals from interference while pursuing their legal or moral rights; and promote the welfare and well-being of individuals. Recognition of individual moral rights is essential for a healthy society or business so that each individual can pursue his or her interest without undue interference or obstruction by others—though that interference or obstruction may lead to some greater benefit to others—compared to the benefits that the individual may gain from the pursuit of his own interests. For example, a person may set up an ‘ashram’ on his own land to pursue his religious beliefs and convictions, and no one in the society can interfere with that on the grounds that a school set up in the same location would be more beneficial to society. Others may convince that person, but cannot force him. Similarly, an employee of high merit (e.g. a researcher), exercising his rights to seek better growth, may decide to join another company. If he so decides, no one can morally force him to stay in the company—although that would benefit the company more in terms of new business and success. In general, moral rights take precedence over the rules of utilitarianism when it comes to settling disputes or conflicts of interests and morality, unless the impact of the issue on the society is so great that people at large would rather go with the choice of lesser harm or greater benefits. For example, a person, using his rights to pursue, may decide to put up a liquor shop on the roadside across a school. Considering his business would cause psychological harm to a large number of school-going children and the nearby residents, the propriety of such an action

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can be debated as per the rules of utilitarianism. Considering that his business would have limited utility in society, other justifiable alternatives could be worked out, to convince him to shift his liquor shop to a location away from a school or residential area. The objective of this change in decision would be guided by the fact that a liquor shop alongside a primary school is not morally correct, and that relocation is morally justified. Similarly, hawking merchandised goods on city pavements or footpaths is often justified by the moral consideration that hawkers have the right to pursue their interest in a manner that benefits a large section of consumers; but the same cannot be morally justified in the society when one considers the encroachment of the moral rights of citizens to use pavements freely and move safely amid city roads. Congestion in city areas and the threat to safety and security of citizens due to such encroachments on roads and pavements are denial of rights to citizen. However, since the issue bears a larger economic impact on the livelihood of many hawkers (as is common in Indian cities today), moral rights may take a backseat and utilitarianism may be allowed to decide the course of action. Likewise, the right to carry on a business may be restricted if the business or industry causes pollution or is known to pollute the adjoining areas. Thus, there is a trade-off between moral rights and utilitarianism when it comes to areas of serious social implications of the actions. In the Indian context, the Supreme Court is the final authority to judge the extent of allowable rights in circumstances of any infringement of rights. Protecting moral rights is the supreme task of a society as well as the legal authority of a country so as to ensure health and happiness of its citizens. Business enterprises are no exception to this. In the words of Ernest Hemingway, ‘What is moral is what you feel good after’. Moral rights are, thus, a bar which when crossed should give all parties involved in the subject matter a sense of good feeling and satisfaction.



Duty is either contractual obligation or mutually understood obligation. An employer has certain duties towards its employees—providing safety, recreational facility, health checks, good workplace environment, clean drinking water, regular and timely payment of wages, etc. Failure to provide these may be termed a violation of moral duties, and employees may well demand them in the workplace. Similarly, employees are also duty-bound to their employer to work with honesty, discipline, trustworthiness, obedience, etc. If an employee fails herein, it may construe as failure to behave morally. Generally, a company conveys behavioural moral standards, applicable at the workplace, through its service rules and codes of conduct. If the duty is contractual, and a violation has serious consequences, it may be tenable under the law for punitive actions; otherwise it is considered a moral violation and actions can be taken as per the company’s code of conduct. However, obligations for duty cannot force an employee to do any immoral or unethical job. A common example of mutually understood obligation (i.e. duty) is the relationship between a doctor and his patient. A person, seeking medical treatment, has the moral right to go to a doctor practicing nearby or to a hospital, and it is moral duty of the attending doctor to consider the patient’s problem and offer treatment. Here, it is the mutually-understood obligation of rights and duties that brings them together. Though business is bound by the contractual obligations of duty, society and social welfare mostly runs on mutually understood obligations and duties.

Ethics in Business and Corporate Governance

Contractual rights and duties arise when two parties enter into an agreement for a specific purpose and end-result e.g. employment, supply of goods and services, execution of a turnkey project, etc. Here, the rights are limited by the contract terms and the duties are limited by correlated activities. For example, when a manager is appointed for territory-wise marketing of a product, the employer is entitled to his best performances in that territory, and the employee is duty-bound to provide his best services in selling that product in that territory. If there are any constraints in the performance, the employee has the rights to bring the same to the attention of the employer and the employer is duty-bound to attend to that problem. Failure of honouring any of these rights and correlative duties could lead to loss of benefits and lower utility of the services. Thus, both employer and employee have duties and rights towards each other, which are to be understood (in the context of the job or contract) and performed with mutual understanding in order to fulfil the terms of the contract or employment. Furthermore, as a result of this employment, the employer and the concerned employee have contractual rights and duties only to each other—and not to any other external person or agency. If any supervisor lays claim to the relationship of ‘duties and rights’ in the workplace, then that supervisor can do so on the authority of the employer and, in that event, the supervisor is the virtual employer with all associated rights and responsibilities. To understand contractual rights and duties, we must analyse their distinct characteristics, which are: 1. Contractual rights and correlative duties are not universal—they get attached to only those specific individuals who are a part of that contract. Like, for instance, between employer and employee, buyer and seller, supplier and customer, etc. Thus, rights and correlative duties between the government and public cannot be contractual unless there is a specific deal or contract between the two; all such issues have to be dealt with either legally or morally. (In this regard, refer to the discussion on citizens ‘rights to work’, which has been treated as ‘moral rights and duties’ only in the analysis in Sections 1.3 and 2.4). 2. Contractual rights and correlative duties can arise only when there is a contract or agreement or transaction between particular parties with the provision of considerations and benefits. For example, an employee will render a job and the employer will pay remuneration; a seller will sell goods and the buyer will pay the price; buyers will buy products and manufacturers will provide after-sales service; etc. This implies that unless one person or party promises or agrees to a duty, the other does not acquire a contractual right over that person or party. Yet, moral duties and rights may not depend on a contract thus expressed. For example, a student seeking admission in a college has the moral right to good education and the college has the moral duty to provide that to its students— though no contract may have been expressed to that effect at the time of admissions. 3. Contractual rights and duties can be imposed only if the performances involved are a part of the publicly recognised systems or laws. For example, an employer has the right to ask an employee to work for eight hours per shift with a break of half-an-hour as per the provision of factory laws and the employee has the duty to comply with the same; but a labourer on a farm, where no such government laws may apply, could be asked

Principles of Ethics

by the landowner to work for 10 hours with an hour’s break for lunch, if this system is prevalent and recognised publicly in that area. Here, the landowner is aware of that right and the labourer is equally aware of his obligation towards that duty, as this system is prevalent and recognised in that region. Publicly recognised systems and verbal promises are, thus, often counted as contractual agreements especially in rural and remote areas where there are not many facilities to draw legal contracts. One common example of such an imposition of rights and duties is the marriage of two adults, one male and other female, which is mostly performed as a publicly recognised system in the society. Modern business operations cannot function smoothly without the imposition and application of contractual rights and duties. Business transactions can include any of the three types of contracts described earlier—including verbal agreement of rights, responsibilities and duties—pertaining to the performance of a specific assignment. The institution of contract —imposing contractual rights and duties, in whatever forms it may be—provides flexibility in operations and creates an atmosphere of trust and confidence in the organisation, thereby helping to avoid conflicts of rights and duties. For example, the Director of a company may ask his Marketing Manager to represent him in a committee of the Chamber of Commerce, with a view to ensure the protection and propagation of company’s interests. Though this may not be a part of manager’s job contract, the director has the right to assign the task and it is the duty of the manager to perform that assignment.Without this understanding of rights and duties in the workplace, business operations would have become inflexible and difficult to manage. Often, a business runs on verbal instructions, i.e., one party exercises its rights verbally and the other party obliges by doing the duties as instructed—as long as the instruction is not unethical. In such cases, that party which exercises its rights has the moral responsibility to own up to or share the consequences of the action, if anything untoward is to happen. In such cases, the contractual rights and duties pass through the words of the individuals concerned—as mutually understood obligations—and in the smooth functioning of the business.

2.4 ETHICAL RULES FOR CONTRACTS AND CONTRACTUAL OBLIGATIONS Considering that contractual rights and duties are at the hub of the machinery that helps run businesses, ethicists insist that such contracts should adhere to certain rules and systems for a clear understanding of what one party is offering and the other is accepting. A part of such contracts can be legally enforceable and another part can be pure moral obligations. For example, in the earlier case of the disabled employee seeking employment for his wife, it may not be legally enforceable but the wife’s employment can be morally justified. To enforce the performance under contractual rights and duties, a contract should have the following characteristics for its ethical acceptance: (i) Both parties in a contract must have clear understanding and full knowledge of the nature of the agreement they are entering into; (ii) Neither party to the contract shall intentionally misrepresent the facts of the contractual situation to the other party;

Ethics in Business and Corporate Governance

(iii) Neither party to the contract must be forced to enter the contract under duress or coercion or deceit; and (iv) The contract must not bind the parties to any immoral or illegal act. Any contract that violates one or more of the aforesaid conditions is considered void and not morally tenable or ethical. The importance of these characteristics for a valid contract can be easily visualised with reference to many sales offers in the market. For example, in the Indian sector, as often reported in the media, homebuyers are misled by intentional misrepresentation of factual situations. Later, when such cases are referred to the Consumer Court or to any other court of law, very often the contracts are struck down essentially due to the inherent violation of moral duties and rights—superseding the dictum of traditional commercial law of ‘buyers be aware’. Examples of such contract are plenty, be it in health care operations, financial products (e.g. mutual funds), etc. where customers are made to sign contracts or agreements with the intention of disowning any responsibility for damage later on. But, can this absolve a company or organisation of disregarding its duty and responsibility towards its customers? Sociologists and ethicists question such practices—which are conducted with a view to self-guard rather than with the intent of performing one’s moral duties—when it comes to protecting the interest of individuals in a fair, moral and equitable manner. As per the utilitarian approach, a person has moral rights to an action or performance because this maximises the benefits or utility for the maximum number of people. Generally, this is conditional to the fact that an action should produce maximum utility and should also be a morally correct decision. A view contrary to this approach is that, if a person has the ‘moral right’ to do something, then that should be irrespective of utilitarian benefits. In support of this view, Immanuel Kant, a pioneer in social studies in the fields of moral rights and duties, propagated the idea of moral rights and duties based on the theory that all human beings possess certain moral rights and duties regardless of any utilitarian benefits that the exercise of those rights and duties may derive for others. Kant viewed the moral rights and duties as imperative in a society where everyone should be treated as equal to everyone else. This means that everyone in the society has a moral right to equal treatment, and everyone has the correlative duty to treat others in the same way. His approach to imperative rights and duties—known as Kant’s Principle —encompasses the following points: 1. An action is morally right for a person in a certain situation if his or her reason to carry out that action is one which he or she would be willing to accept as good enough for other persons to adopt similarly under similar situation. For example, before firing a subordinate on the spot for some mistake, the manager should ask himself if he himself would have liked to be fired similarly by his own boss under a similar situation (without any opportunity to explain or defend the mistake). Such situations are not uncommon in industries especially when dealing with contract labourers. Similarly, before misinforming about the utility of a product to an ignorant customer, a salesman should ask himself if he would like to be treated likewise when while buying a particular product from the market.This implies that one must be ready to accept all those reasons that one uses as valid for others to use in similar circumstances—even if others were to use those

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very reasons against him. In many ways, this approach reflects the oft-quoted proverb: Do unto others as you would have them do unto you. 2. An action is morally right for a person if, in performing the action, a person does not merely use others as a means to advance individual interest, and both parties involved in that action respect the principle of choosing freely and having equal capacity to do so. This implies that a person should not be treated as an object incapable of choosing freely, nor be exploited to satisfy the self-interests of others. It recognises that all human beings have equal dignity, and should not be treated as mere tools or cogs to satisfy one-sided interests. For example, in the earlier cited issue of pharmaceutical companies conducting clinical trials, the company must not use a patient who is in distress as a means to try a new medicine that is being developed, and, if it does so, the company must explain the risk and allow free choice to the patient before administering the new drug. This principle of free choice and equal right also objects to the fact that an employee can be asked to do any task without his consent and without the scope for free choice if that act exposes him or her to any adverse consequences such as a health risk, moral hazard, etc.This principle also has an important bearing on any fraudulent or forceful contract that a person would not have otherwise entered into given the right to choose freely. For example, a hospital should not make a patient sign a no-objection and no-indemnity bond before being treated for an ailment. Because, one should be granted the right to freedom to choose one’s action, and protection against being used as a mere tool under a given situation for the fulfilment of other’s self-interest. To summarise, Kant’s principle states that (a) if something is moral to me, it must be morally right for others too; and (b) everyone is of equal value and has equal freedom. The former implies that if it is moral for one person to do something vis-à-vis others, then it will be moral for others to do the same to that person. Kant’s ethical stand is aimed at forbidding exploitation, of the weaker party in a contract, to take advantage of the situation and suit selfish propagation of interests of the stronger party in that contract. In a contract, people are morally obliged to treat each other as equal and free to choose their own interests. Thus, Kant’s principle plays a dominant role in safeguarding ethics in the contractual dealings of business operations, and has particularly benefitted workers or employees in industries and business houses. Let us examine Kant’s principle in view of trade unionism in industries: A factory-worker joining a trade union is considered as having accepted to abide by the rules and regulations of that union. Now consider the eventuality that the union has declared a strike in the factory: (i) Can it force all the workers to join the strike? (ii) Is it morally right for a worker to disassociate himself from the strike, on his own free-will, as he does not believe in the cause, although the cause may further even his interests? (iii) Can the factoryowner threaten to sack the worker who has joined the strike? Considering the four ethical characteristics of a contract mentioned earlier in this chapter, if the worker has joined the union with full knowledge and understanding of his rights and duties, and union regulations state that all members should abide by its directions, then that worker is morally duty-bound to join the strike—unless the strike is immoral or illegal, as per the utilitarian approach to

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justify an action. However, the worker can express his disagreement internally—and not publicly—in a meeting with union leaders; but, otherwise, he is duty-bound to follow the union’s decision. However, as per Kant’s principle, any individual cannot be treated as an object incapable of making a free choice and should not be used as a mere tool to satisfy other’s interests. This implies that people should not be treated as objects incapable of choosing freely, and should not be exploited to satisfy the interests of others; all human beings have equal dignity and they should not be treated as mere tools or machine or a cog in the wheel to satisfy one-sided interests. Therefore, if the employee does not believe in the cause for which the strike has been called and chooses not to join the strike for a reason that he would apply equally to all those concerned, including himself, then he cannot be forced. Similarly, the employer cannot threaten to sack the worker—by taking advantage of this situation wherein the worker does not have the support of the trade union—in order to force him to do a task beyond his contractual duty against the free will of the worker. On the other hand, in consideration of the contractual ethics, the employer—after agreeing to the rights of the trade union and recognising its functioning—cannot force an individual worker, also a union-member, to return to work during the ongoing strike, nor can the employer punish a few individuals who have joined the strike. What the employer or management can do is to negotiate with (or take action against) the trade union with a view to calling off the strike.

At times, however, problems arise with regard to the type of interest that entitles one to ‘moral rights’ as per Kant’s theory. In the earlier cited case of trade unionism, the union may have moral rights to negotiate a fair wage for its members, but can the union also use moral rights to negotiate a holiday allowance simply because it is given to senior managers of their company? A company may refuse to discuss this interest of the trade union on the grounds that the holiday allowance is a perquisite given to managers as incentive for superior performance, but not to all the employees because the production bonus they are availing of is, itself, the incentive and benefit for good work.Therefore, a trade union cannot interfere in the company’s discretion about what to grant to the managers and how to get better quality of work from the managers as long as these actions do not harm the workers. Thus, moral rights, as imperative in Kant’s theory, should not be confused with bargaining power or as the doorway to forcibly enter into a new contractual obligation. Kant’s basic aim was to bring uniformity and equality in social and economic dealings in matters of moral rights and utility. Thus, for ethical fairness, enforceable contractual rights and duties for a given performance should comply with Kant’s approach to morality and equality of all parties in a contract.



The nature of ethics in business is embedded in the inherent concepts of rights, duty, care, justice and fairness. Thus, the study of ethics, as applicable to a business or otherwise, should simultaneously deal with both the approaches—it should not only obey the principles of rights and duties, but also be just, fair and moral. Justice, fairness and care can again attract legal or moral stands.The Constitution of a country and its legal provisions and interpretations provide the umbrella of justice to common citizens.

Principles of Ethics

Justice in civil society generally means legal justice, which is the right of any citizen of a nation. Yet, there are some issues which are not included in the concept of legal justice but are considered part of moral justice. For example, if a victim of a car accident on the road does not have ‘third party insurance’, he or she may have to take on a legal battle to get compensation under the law. However, the victim cannot be denied care and compensation under the convention of moral justice. The question, here, is: Who would provide (moral) justice to the aggrieved party—the offender, the state or any other agency? Ideally, the offender or his insurer should be made to pay; otherwise, generally, the state or an agency such as an NGO can voluntarily undertake such moral and caring work. Whatever be the case—legal or moral—justice can be ensured, if required, by some kind of legal action in a civilised society. Law can enforce an expected justice on moral grounds when the violation of justice is of serious nature and warrants taking up with law-enforcing authority. This point is further illustrated with the following examples: As reported in the news media, a well-known university in the country denied admission to a student who had qualified in the entrance test conducted to assess suitability of candidates for admission to the course. The student was superseded by another candidate who had secured a lower rank in the same test. This was considered serious violation of justice, and the matter was referred to the Calcutta High Court which ruled that the university must provide admission to students in order of their merit—so as to maintain the structure of egalitarian equality. In compliance with this court order, the rejected student was admitted and justice was thus restored. In another case, as per the result declared by the university, a meritorious student unexpectedly failed in a subject that disqualified her for admission to a higher course. She appealed to the High Court with the petition of re-examination in the said subject and permission to see the mistakes she had made in her paper. After thoroughly going through the university’s processes and procedures to correct examination papers, the court ruled in favour of the candidate and ordered that she should be shown her paper—to ensure justice on moral grounds.

As a guiding principle, justice demands equality in treatment under similar circumstances.This implies that every society or business must treat its members or employees in a just and fair manner, i.e., they should be meted out similar treatment under similar circumstances. Discrimination of wages for a similar job due to colour, creed or sex is considered unjust, and attracts criticism for being immoral. In a business place, such a situation may be considered as serious injustice, and can be taken up with the law-enforcing agency with a view to secure justice in the regard. Similarly, knowingly asking people to work in an unsafe and hazardous environment is not just or fair. For example, frequent mining accidents in the coalfields of east India occurring due to unsafe mining practices have been severely criticised by all as unjust and unfair business practice leading to the death and misery of mine workers. In fact, this is continuing due to an acute shortage of employment opportunities in the concerned areas, and unfair business practices of exploiting and forcing miners to work in hazardous and unsafe conditions. Such practices in any business are totally unfair and unjust, and principles of business ethics forbid the same. However, unlike laws, ethics have no teeth to bite with, unless a law-enforcing agency takes note of the ethical and moral violation, and directs the offenders to restore justice and fairness

Ethics in Business and Corporate Governance

in dealings. In the case of the miners, their management can be asked to strictly follow safety rules during mining operations so as to minimise or mitigate their sufferings.The law-enforcing agency can also direct the owners or management of the coal mines to explain reasons for the failure of safety norms and to expedite corrective and preventive actions. Many social scientists feel that what matters more than the utilitarian approach to rights and duties, is justice and fairness of dealings in business operations. Disputes in industries and businesses are often more involved with the question of justice and fairness than with maximum benefits or utility. And, in the context of such issues, justice and fairness are often used interchangeably though the objective—to secure justice—remains the same. Stands of justice do not, however, override or diminish the importance of moral rights of individuals. In fact, as discussed earlier, justice is often based on moral rights that accrue to an individual. The law ensures that any individual participating in any social, commercial or business related activity on his or her free will gets justice and equitable benefits. Meaning, while one has the moral right to choose or participate in an activity, he or she can also claim justice and fairness in the dealing, such as fair wages or benefits as per the share of his or her work. No one can be forced to participate or perform in order to acquire or accrue benefits exclusively for others. As an individual, one has the moral right to choose and pursue an activity, and he also has the equal right to fair, just and equitable benefits. In business, this may imply that: (a) A person engaged in a difficult, meritorious or hazardous job can ask for wages and benefits higher than others; and (b) No one can seek equal benefits for all by citing ‘equality’. Justice is served by ‘equity’ of distribution of benefits and not by equal distribution—because all the employees do not perform similar tasks in the course of a business. Justice demands that benefits and burden from his or her pursuits or participation should be equitably distributed. This view of justice has important implications in a modern business scenario in terms of satisfying the hunger for reward and justice in areas of human resource management. As success in business is critically dependent on human efforts and contribution, care must be taken to keep employees motivated by just and fair wages and reward policy. In business, the spirit of justice in guiding a wage policy is to ensure that everybody is paid equitably for doing similar kind of jobs. This would ensure that a company does not have discriminatory pay structure for jobs of the same class or nature— irrespective of the employee or worker. How, then, can the company be fair to a talent which contributes more at work? It would be unfair to ignore his or her additional contribution or higher burden. Let us elaborate on the answer, as follows: The creation and protection of intellectual property is an important driver in the pharmaceutical industry. Hence, a company in this business has to constantly motivate its employees in such a way that their work leads to the development of new drugs and patents (intellectual rights). Moreover, encouragement of such innovative work is important for the company to attain its business goals. At the same time, employees who endeavour more to bring about new patents have the right to benefit from their distinguishing work. Such expectations are just and fair. Hence, companies would only be fair in instituting special rewards and schemes for all such meritorious work.

Principles of Ethics

Naturally, then, companies resort to different scales of payment or incentive schemes that benefit those employees who contribute more than others in the job. But, to be fair to all, such schemes should be just and transparent to all. In effect, every individual has the moral right to justice and fairness in deals in an equitable manner. However, moral rights do not entitle a person to ask for something that he or she is not associated with or performing for. This also does not entitle a person to the moral right to refuse a job at the workplace—if he had chosen to accept it with the full knowledge of what his or her role comprised. For example, it is not within the moral rights of an employee to refuse to work in the night-shift, if he has knowingly accepted the job involving night-shifts as a part of his employment contract. He is duty-bound to participate in such work schedules unless the company willingly changes the duty pattern. But, justice demands that he should be equitably and fairly compensated or benefited for his participation in the night-shift as per company norms for similar work. These examples are a few simple illustrations of the spirit of justice, rights and obligations in the workplace. More detailed analyses of the same are provided in subsections that follow.



The analysis of justice and fairness is not a very straightforward exercise. Generally, justice refers to fair treatment or punishment in accordance with the law or moral standards. And, in this regard, the question or issue of justice can be divided into three categories: distributive justice, retributive justice and compensatory justice. Distributive justice is concerned with the fair distribution of benefits and burdens arising from an act or situation, or owing to the participation of an individual or a group in some activities, or due to some social, natural or accidental reasons. Application of distributive justice is mostly concerned with cases of conflicting claims and demands on the society or the state or a body, which cannot otherwise be easily settled to everybody’s satisfaction. As justice demands equal treatment under similar circumstances, distributive justice attempts to ensure that benefits and burdens are always equitably distributed.This can be explained with the following example of compensation offered to accident victims: In the case of compensation offered to the nearest relatives of all the victims of an accident inside a factory, justice demands that the compensation is fair and equitable, based on the company’s rules. The management may decide that the compensation to employees in the managerial category is higher than that given to the factory labourers, but this should be the norm and not an exception. Thus, relatives (or nominees) of all the accident victims may not necessarily get the same amount in compensation as per companies norms, but justice demands that norms are not changed from victim to victim in the same class or category of employment. It is not a violation of justice if the management affixes two different norms for two different categories of employees, but it cannot discriminate among the same class of managers. The purpose of distributive justice is to ensure consistency in the way one should treat similar situations.

This, however, leaves the question of how to decide who should get what. One may take recourse in identifying certain characteristics to determine who should get what. For example,

Ethics in Business and Corporate Governance

in the case of compensation to accident victims, the company norms may consider the average earnings of each worker over the past 12 months to arrive at the compensation amount. Rationalists may argue that the compensation should be based on the loss of future earnings and not on the past, i.e., it should be based on some norm of computation of future earnings. A company is free to choose its norms from among these alternatives, but there must be a rational basis for its choice, i.e., the choice should be based on a principle or rationale that is fair and just for all concerned. Fundamentally, distributive justice says that equals should be treated equally and unequal should be treated unequally, and there should be consistency in the treatment. In other words, individuals who are similar in all respects, vis-à-vis a given task, should be treated similarly (i.e., not differentiated or discriminated) for the distribution of benefits or burdens, even though they may be dissimilar in other aspects of their life and living. Here is a case in point: If the qualification and capability of a woman for a job are the same as a man’s, then there can be no discrimination between the two. Similarly, individuals who are dissimilar in the relevant respect for a job or benefit should be treated dissimilarly in proportion to their dissimilarities. For example, the pay structure of office staff may differ from that of the technical staff on the shop floor due to dissimilarity in the nature of their jobs, though all of them may work for similar number of hours and may be similarly educated. Such a dissimilar pay structure cannot be objected to on ethical grounds.

Distributive justice is commonly called for in business—in areas like employee gradation and promotion, wage policy, eligibility for different types of perks, dealers’ commission, dividend distribution, etc.—with a view to ensuring equality, uniformity and consistency in operations. An important area of the application of distributive justice is the fixation of wages, where an employer cannot discriminate if two persons with similar skills and experiences are doing similar jobs and working for similar hours. The rule of distributive justice demands that society and business should be consistent in the way they treat similar situations or two equal parties. An example, in case of the latter principle, would be the sale of commodity goods on a ‘first come first serve’ basis. This way, the shopkeeper ensures that there is no differentiation among customers (all customers are equal to a shopkeeper) when it comes to distributing the commodity till it lasts. Another similar example is the sale of railway tickets across the counters or through the website of Indian Railways. The Railways follow the ‘first come first serve’ principle and all customers are treated equally and served as long as seats are available on the desired trains. An offshoot of the distributive justice is the question whether two persons are always equal. This part of the analysis of justice, referred to as Egalitarianism, advocates adherence to the doctrine of equal political, economic and legal rights for all human beings. This is an attractive ideal from the viewpoint of a socialist society, and not following this rule may be considered unfair and inequality in the society.Yet, it cannot be construed that all social benefits and goods should be allocated to people in exact and equal proportion. Equality, in practice, means equal opportunity to live and grow, which implies that individuals have to make or exert individual effort to avail the same. Not offering opportunity for equal living and growth in a society is unfair and injustice. This brings us to the relevant aspect of understanding distributive justice with regard to

Principles of Ethics

distribution as per ability and efforts. Here, it must be recognised that all people are not created equal in all respect, i.e., people will be difference with regard to qualities—ability, intelligence, learning, attitude, etc.—which make them different in their ability to contribute in society. Thus, social scientists argue that benefits and burdens should be distributed equitably, i.e., in a just and fair manner in proportion to one’s ability and contribution for the well-being of the society. Otherwise, society will suffer to the detriment of all. However, egalitarianism has been the source of justice for the underprivileged in a society where the state or community takes necessary supportive measures to allow every person the rights to a minimum standard of living or behaviour in the society. Thus, in addressing distributive justice, equality in the distribution of benefits and burdens should be considered to the extent possible and without affecting the benefits that are (or could have been) accrued to others due to their superior ability and contribution; otherwise, this system of distribution may put the society in jeopardy. Retributive justice refers to the imposition of some demands or something given or meted out as repayment for an act. In practice, retributive justice is generally concerned with the justification of punishment and blame for a wrongdoing. However, this principle may be extended to both reward and punishment for an act. Retributive justice demands that a ‘just action’ should be taken either as penalty or reward in a manner that deserves the cause for which the penalty or reward is being meted out. It generally deals, in practice, with the conditions under which it is just to punish a person for a wrongdoing. For example, failing to attend to duty without prior notice may be wrong, but it would not be just if the management suspends an employee for such isolated offence. However, if an employee becomes a habitual latecomer or absentee, he or she may attract heavier punishment like suspension of duty, etc., and that would be considered just under the circumstances.

This necessitates that, for the application of retributive justice, the seriousness of the wrongdoing and the moral responsibility for the wrongdoing should be first established. Thus, as per the principles of establishing moral responsibility, ignorance about the consequences of one’s act or the inability to control the happening (the wrongdoing) may be excused under retributive justice. It further implies that, in business operations, penalty and punishment for non-performance must not be ad hoc; it should be just and proportional to the cause and effect. Applying this logic to the case of absence from duty without prior notice, the absence (i.e., the wrongdoing) has to be examined in relation to the cause of the absence and its effects before meting out any punishment. Similarly, if an employee is sent out to draw some cash from the bank and is robbed under life-threatening circumstances on his way back to office, he cannot be held morally responsible for the loss, nor can he be punished for his failure. Principles of retributive justice demand that before meting out any punishment, the company factually determines that the wrongdoing has actually been done by the person concerned and that he or she is morally responsible for the act. Thus, penalising a person or a company for a matter on unclear and doubtful grounds amounts to injustice. Even if the wrongdoing is clearly established, principles of retributive justice demand that the punishment be proportional and consistent with either the past practice (of the company) or what is exactly necessary to prevent

Ethics in Business and Corporate Governance

further occurrences. Thus, for similar offences, a manager cannot be lenient to an employee he likes, and harsh to the others in the office—if he is to be just and fair in his dealings. Compensatory justice is that which deals with the justice of restoration for being wrongfully harmed by somebody else. A common example would be the case of ‘third party’ insurance of vehicle owners, which is meant for the wrongdoer as a means to indemnify the harmed person. Here, the car owner has taken pre-emptive action by insuring himself or herself against such happenings, thus ensuring that the principle of compensatory justice is upheld even under the condition of inability of wrongdoer (to compensate the victim). In indemnifying the harmed person, compensatory justice demands that he or she is compensated to the extent of damages suffered. Justice in such cases demands the restoration of whatever one has lost (or suffered) because of the person (or by his or her appointed or contracted agent) who has caused the harm. Compensatory justice demands that a person who has done wrong should restore or equally compensate for what has been lost or harmed. But not all losses can be compensated, e.g., loss of life or reputation. In such cases, the rule of justice permits restoration of material damages from such injuries or wrongdoing. However, some ethicists feel that a person has the moral obligation to compensate a harmed person (victim) if the wrongdoing is due to negligence or is wilful or voluntary, and the injury is directly caused by the action of the wrongdoer. Approaches to compensatory justice are aimed at stopping wilful and deliberate actions that can harm or cause injury to others, and thereby regulate the conduct of business and personal actions that can affect the society. For example, under this rule of moral justice, an employer cannot deny proper compensation to an employee who has suffered damage or loss of life or has been disabled while on duty. It also covers the moral responsibility of an industry or business to offer adequate and just compensation in case of failure due to negligence to protect health, life and environment of the neighbouring areas, e.g., the gas leak at the Union Carbide plant in Bhopal, or the pollution of Ganga river due to unregulated discharge of industrial effluents by various industries located on its banks. There are few other types of justice, like the justice of equality, justice based on contribution, justice based on needs and abilities, and justice as fairness. All these deal with some specific situations, but have important bearings on the issue of justice and fairness in practice. Justice of equality states that every person working in a group should be given equal shares of the group’s benefits and burdens. It applies to society, business and families. For example, as per justice of equality, all employees working in a particular production-line should enjoy equal incentive plans; or all customers should be charged the same price for a given product. In the latter case, customers are considered an integral part of the company’s business since they consume the produce as a group. However, the principle of justice of equality is criticised for being unable to differentiate superior skills and talents of some individuals and to compensate them as per their individual contribution (or potential to contribute) to the cause of society or business. This is because, it has long been proved that people may differ in their ability, effort, intelligence and creativity as well as in their needs and desires, all of which have an important bearing on the social well-being or on the benefits of a business. It is functionally important for a business to have opportunities to reward those whose efforts and contribution are greater and this has been accepted as just and fair for successfully running a business. This concept

Principles of Ethics

leads to the justice based on contribution, which states that benefits and burdens should be distributed in proportion to what each individual contributes to the cause or action. This is an important rider to compensate capable persons engaged in a business, but justice demands that implementation of this kind should be impartial and fair. Thus, the principle of justice based on contribution plays a significant role in affixing remuneration and incentives for executives in industries. But, the critical part of this exercise is to measure and evaluate the ‘value of contribution’ of an individual so as to be in keeping with the principle of ‘distributive justice’. Companies frequently fail in maintaining impartiality and fairness in such measurements or evaluations, leading to conflicts of justice in dealings. As a result, many argue that justice based on contribution may be decided on the basis of the demand and supply of such persons or products or services in the market, but this method relies more on ‘intrinsic value’ and not the proven value. In many cases, after the utilisation of the person, product or service, the proven value may differ from the assessed or intrinsic value, which invariably causes dissatisfaction in the group or society and creates a sense of injustice in the distribution of benefits. Justice based on needs and abilities is an old concept drawn from the socialistic approach to sharing benefits in a society. According to this principle, the burden of work should be distributed as per people’s ability, and benefits should be distributed as per people’s needs. The best example of this approach is the typical Indian joint family system (read Hindu undivided family or HUF) where few people of a family earn as per their ability and all the family members enjoy their living as per their needs. However, in the face of competition, changing social pattern and globalisation, this concept is losing its appeal except in the management of government and public resources where ‘socialistic pattern of the society’ is still the guiding principle as it is in India. The current trend in business is to rely more on the principle of justice based on the ability and contribution rather than on needs and wants, except in the running of NGOs and government organisations.


Justice of Fairness

Forwarded by John Rawls, this concept provides a modified but comprehensive approach to distributive justice so as to take into account all the principles of justice discussed thus far. The purpose of this comprehensive approach is to safeguard the interest of minimum standard of living in a society and to fulfil basic needs vis-à-vis ability, efforts and contribution, and thereby ensuring that all sections of the society or group have been treated fairly. Rawls proposition comprises three basic principles: (1) principle of equal liberty, (2) principle of inequality, and (3) principle of fair and equal opportunity. The principle of equal liberty states that every person’s basic liberties must be protected from the invasion by others and must be equal to those of others. For example, every shareholder present at the general meeting is entitled to cast his or her vote to decide about certain actions of the company; and, if the company takes undue advantage by stopping or ignoring such right to vote, then it is unfair and unjust. The basic liberties include freedom of speech, right to vote, right to live, right to personal privacy, right to hold property, right to get protection under the law of the nation, right to choose one’s profession, etc. The long arm of this principle of equal liberty reaches out to our personal lives and in business dealings. For example, this principle

Ethics in Business and Corporate Governance

forbids forceful engagement to a job, trespassing into personal properties, invasion to privacy of personal life, denial of rights to negotiate and contract on an equal basis, denial of rights to fair trial, etc. The principle of inequality (also called the difference principle) prescribes that though there could be inequality in a society, steps must be taken to improve the position of the needy and helpless in society in order to maintain justice, fairness and welfare. If steps are not taken to improve their lot, the society will be burdened—rendering everybody worse off than before. Rawls prescribed that the more productive a society becomes, more should be the benefits provided to its needy and disadvantaged members. This standpoint of justice is at the core of good governance and corporate citizenship of a business or company. Companies or corporate houses engaged in social service and philanthropic trusts are examples of this principle, e.g., The Bill and Melinda Gates Foundation (one of the largest health initiatives in India), J. N. Tata Endowment Trust (for meritorious scholarships for higher studies), etc. Many ethicists claim that such a view to ensuring justice in society demands that corporate houses or companies manage their business in the most efficient and effective manner in order to be able to serve the causes of the poor and needy, thereby ensuring a healthy society which is not unduly burdened. The principle of fair and equal opportunity prescribes that everybody in the society should be given fair opportunity to pursue their choices, and to learn a trade or develop skills to improve their contributions to the society. It would be unfair to decide a person’s benefits as per his or her efforts, ability and contribution without such opportunities. This stand on fairness is a significant pointer towards the expected role and responsibility of government and business organisations either to create educational and training facilities for their citizens and members or to take necessary actions for the upliftment of the poor, needy and underprivileged members (through activities involving health care, primary education, facilities of potable water, etc.). Let us examine this principle of fair and equal opportunity with the help of a case discussed earlier: If we apply this principle to the government’s initiative to provide special reservation, for backward-class students, for admission to colleges for higher education, it may appear to be a fair decision on the part of the government in order to uphold the principle of fair and equal opportunity. But, when considered in totality, the move must also not infringe upon the liberty of other students who seek higher education through merit or ability. Such infringement will attract criticism about an individual’s rights to benefits from his or her ability to contribute. One of the main aims of such rights is to enable individuals to choose, pursue and protect their interests in a just and fair manner. Hence, those students who do not belong to any backward class and who are prepared to avail the benefits of higher education through merit, may feel that their rights to higher education is being curtailed in an unfair manner. In view of this apparently conflicting approach, the solution to the problem of special reservation seems not-so-straightforward, and needs careful assessment and applications with regard to the principles of rights, duties, morality, justice and fairness.

However, if we consider that the purpose of advocating ethical behaviour in society and in business is to ensure they are not burdened but that they benefit from an action, then it would only be fair to seek an optimal solution to the problem—one that would maximise benefits to the society at large. Also, distributive justice demands equality in treatment under similar

Principles of Ethics

circumstances and consistency in the way similar situations are treated. From these standpoints, one may argue that government must first create the conditions of similar circumstances by providing specially aided, good primary and secondary education to the backward classes before embarking upon offering them reservation in higher and professional courses, where the ability and quality of outgoing students could seriously impact the ability of the nation to grow in today’s competitive environment. At the same time, the ‘principle of inequality’ must spur business houses and other members of the society to recognise their moral duty so as to improve corporate governance that may give rise to inequality affecting the needy and helpless people.This latter demand makes it obligatory for the government and corporate houses to take on various developmental and improvement-oriented programmes in areas of basic needs such as education, training, health care, poverty alleviation, etc. Rawls’ approach to justice of fairness is considered both comprehensive and rational. He prescribed the test of rationality of a principle as the one by which any self-interested group or person would like to be treated and governed in the society without exactly knowing (i.e., being ignorant about) how it is going to be affected by that principle or how it would benefit or be burdened from that principle. In other words, in order to be fair and rational, the principle of fair and equal opportunity asks one to put himself or herself in the other’s shoe before judging and deciding about an action. This type of self-examination will promote impartiality and rationality in action by inducing an individual to think in terms of how good the action would be for the others in the society or the group to which he or she is connected with. Impartiality and rationality of approach are the hallmarks of Rawls’ principles of justice and fairness. Many ethicists feel that this approach to determine fairness in decisions is hypothetical in nature, and cannot always yield fairness and justice as people are inclined to think selfishly. To summarise, Rawls pointed out that if we choose to treat others in the same way that we treat ourselves, or would like to be treated, then that would ensure consistency and fairness in our dealings in society.This principle applies equally to business organisations as well.

2.5.3 The Ethics of Care Care for those we love and are concerned with, while working, living or doing business, is an important element of good living, good citizenship and the general well-being of society. Care is an age-old way to link people to people, to the organisation, and to society. Ethics of care state that: 1. Each of us lives and exists in an environment of care and concern in the society, and we should preserve and nurture these environments and relationships; 2. Each of us should exercise care for those with whom we are socially and otherwise related by attending to their needs, well-being and desires as seen from their own personal perspective, and by responding positively to the same so as to preserve the values of those relationships; 3. Ethics of care is more than just following the moral principles discussed earlier; it involves attending and positively responding to the well-being and welfare of those persons with whom we share close and valuable relationships.

Ethics in Business and Corporate Governance

Care may be a part of moral behaviour, but it goes beyond general moral principles to encompass behavioural elements like compassion, concern, love and friendship. The ethics of care stems from the sense of moral responsibility that we feel about towards family, relations, friends, colleagues, society and our loved ones. It manifests in relationships, trust, teamwork and dependence in our dealings and living in society. Ethics of care is essential to live well and prosper in the society and at our workplace. For example, ethics of care—if not any other consideration—demands that an employer provides a suitable job to the dependant of the employee who died while carrying out his duty in the workplace and when there is nobody else to take care of the family he has left behind. Similarly, ethics of care make it obligatory for a company to take the total responsibility for the medical treatment of an employee who took ill due to the unhealthy work environment (although he may have willingly chosen this employment). On the other hand, ethics of care make it necessary for workers to take care of the employer’s property or the goodwill of the company by behaving appropriately. An employer and employee have a valuable relationship, and the principle of ethics of care demands that they show care and concern for the well-being of each other. Here is an illustrious example of the ethics of care: A fire that broke out during the annual celebration (of the birthday of its founder J.N. Tata) at the Jamshedpur plant of Tata Steel, the flagship company of Tata Group, on 3 March 1989. An accidental but devastating fire engulfed some galleries reserved for employees and their relatives to witness the celebrations. Flames spread rapidly through the wooden galleries and children and women were trapped and severely burnt in the stampede that followed. There were many casualties in the aftermath of this horror and devastation. Within minutes, the entire management team and the employees got into action for the rescue operations. Doctors arrived from the nearby company hospitals attended to the victims; burn specialists were flown into town from all over the country and special medicines were flown in from abroad for emergency treatment. The company left no stone unturned to save the victims. After the initial shock and recovery period, critical patients were taken to various burn specialty hospitals across the country on the aeroplane meant for the Chief Executive of the company. The management extended full help and unlimited financial support to ensure recovery of each patient. Special family cells were formed to visit and counsel burn patients at hospitals and in their homes and to express solidarity and encouragement for early recovery. Subsequently, jobs were offered to near relations of each of the deceased, special air-conditioned residential accommodations were provided to facilitate recovery of the surviving victims, continuing medical treatment at the best hospital in the country was provided at the company’s cost as long as it was needed, compensations were paid to destitute loss, and a rehabilitation training and programme was instituted for the long-term benefits of surviving victims. All these efforts of the company were spontaneous—not demanded by its employees or trade union—and was hailed by the community as most praiseworthy for the well-being of affected employees and the community. Most personalities and social scientists observed that these actions reflected the employer’s concern for care for the employees, and were not merely guided by the need to fulfil moral or legal obligations. The spirit was to respond positively to the needs and desires of the society at a time of distress, to preserve the values of relationship.

Principles of Ethics

This exemplary case stands out in stark contrast with the treatment meted out to the victims of toxic gas leakage at the Union Carbide pesticide factory in Bhopal3, in 1984, when thousands died and many more were incapacitated due to the poisonous gas. The battle for fair compensation and proper rehabilitation of the victims is still ongoing—even after 25 years of the accident. There are many other examples wherein the ‘ethics of care’ have been totally disregarded while dealing with helpless victims of flawed operational practices. Ethics of care go beyond the responsibility of legal obligations, to provide care for restitution, rehabilitation and growth. It should be noted at this stage that the ‘ethics of caring’ are primarily concerned with the concept of ‘caring for someone’, i.e., not being concerned or caring for the self, but for the others in the society or community. Many a time, we may be interested in caring about something that we want to possess, or for someone whom we are personally interested in, for the sake of some special benefits. Though this type of caring is also a way of life in society, the spirit of care in the ethical sense, as it applies to business, is more about caring for someone else—which, in turn, attracts two considerations: value and justice. The consideration of value is reflected in the way we develop relationship with others. Relationships that are based on values command duties of care, similar to those that are characterised by the virtue of love, concern, loyalty, compassion or friendship. Such relationships are progressive for the benefit and well-being of human society, and should be nurtured and maintained in our dealings with others through caring and respect for values. Contrary to this approach, if a relationship is based on threat, violence, dominance, etc., it does not command the ethics of care. The other consideration of the duty of care is ‘requirement of justice’. In other words, if a person does something illegal or unjust, then that person (or occurrence) should not be treated with the ethics of care. For example, if an employee is involved in a fight with a colleague within the factory premises (which is against company rules) and is badly hurt, he need not be shown any ethical care or concern by the employer while dealing with his injury owing to indiscipline in the workplace. Similarly, a person who has fraudulently cheated many clients cannot demand relaxation of treatment (as per ‘duty of care’) from law-enforcing agencies on the grounds of old age or infirmity. In business operations, ethics of care play an important role in maintaining a positive work environment and good relationships, but this should not allow any scope for favouritism or preferential treatment. Figure 2.3 diagrammatically illustrates ethics of care. Favouritism or partiality is not uncommonly displayed by bosses in industries or businesses towards certain persons of their choice with whom they share special relationships. This often creates an unhealthy work environment or loss of moral of other employees in the group. Though the boss may attach special value to some employees, the demand of justice says that any special favours are unfair unless they are also making special contributions in similar work under similar facilities and work environment. Similarly, some employees get differential treatment from their bosses when it comes to dealing with indiscipline—and this is often justified as ethics of care. What such examples bring to the fore is that behaviour as per the ethics of care may

3, accessed on 30 September 2011

Ethics in Business and Corporate Governance Ethics of Care + Feelings

Moral responsibility

Towards: Society and locality

Family, friends, colle-agues and relations

Workplace and enviroment

Outcome: Relationship, trust, teamwork

Interdependence and harmonious living in society/workplace.

Figure 2.3 Ethics of Care: What it Takes and What it Gives

at times be in conflict with the demands of justice. Ethical principles in business operations prescribe that such conflicts should be avoided in the organisation for greater benefits, though there is no fixed rule to guide the company in resolving such conflicts. The only guidelines are the rule of equality and the provisions of service conditions in accordance of which a manager has to work with responsibility and accountability towards consequences of any action. Many consider the care approach to ethical behaviour as bring feminist in nature, where moral issues are seen from the angle of relationship and care, which is typical of feminine character. But, when one examines various approaches available for dealing with moral issues, then caring for someone valuable becomes a moral imperative either in our social life or in efficiently running a business. Ethics of care help in fairly meeting the demand of justice and impartiality in dealings. However, most ethicists agree that the application of ethics of care should not prevent or hamper the management to suitably deal with important and critical employees (who could be key to the company’s success) by showing enough care and concern, but the principle demands that, in doing so, the company or the management should not demoralise other employees in the organisation, i.e., care and justice should be balanced to efficiently run the organisation. Thus, justice may take different dimensions in different circumstances; at times it may be concerned with distributive justice—like the equitable benefits from an action, and, at other times, it could be retributive justice that is concerned with repayment for an act (reward for good work and punishment for poor work). For instance, a Sales Executive failing to meet his order or sales target.Another form of justice is the distribution of benefits based on contribution. Providing extra benefits to someone due to his or her extra contribution is not unjust as long as those contributions are made in a positive sense and do not affect the fair interests of others. For example, the payment of incentives for productive work as per work contribution is an established practice in industries, and such incentive schemes cannot be questioned as being unjust to others who do not get the same benefits due to differences in work or lesser contribution. But, differentiating on the grounds of different incentive plans between two

Principles of Ethics

groups working on similar jobs with similar outputs, but under two managers, is unjust and can be taken as unfair and unethical. Characteristically, fairness and care are purely moral issues, and are often subject to interpretation by the perceptions of people. Therefore, there can be some conflicting views in a particular situation, but dealing with them in most balanced and fair manner is important in business dealings, and the best way to do so is by being transparent, consistent and ethical. For example, if an employee has worked with sincerity and for a long time, is taken ill and hospitalised for a long period, then providing special leave or ex-gratia payment to help him tide over the situation should not be considered discriminatory or unfair to others. Similarly, if an employee dies or is incapacitated in an accident inside the factory, it is morally fair for the company to take care of his family in a suitable manner. A company has the moral responsibility to show care and concern for its employees who have served diligently for years and their families. Absence of such care can demoralise people working in the organisation and the company may not get the best out of its employees. Thus, ethical and moral concerns of the organisation and its managers are of great consequence to the well-being and efficiency of business. What has transpired from the discussions thus far in this chapter is that ethical and moral issues are, in effect, concerned with the rights, duty, justice, fairness and care in dealing with business situations.

2.6 JUDGING MORALITY AND ETHICS Establishing the morality of an action or behaviour or a response by moral reasoning rests on the principles of four types of moral considerations—namely, utility, rights, justice and care. Each consideration has its own view of righteousness and individually points at an important aspect of moral reasoning. But these considerations do not have a common stand and, as such, may not lead to a common answer. Therefore, to decide what is ethically right, all four moral considerations have to be taken into account. However, depending on the situation and purpose, some of these principles may outweigh the stand of others in determining if an act has been moral and ethical.Thus, the process of determining ethics of an action calls for judicious analysis of facts (factual data and circumstances) in view of the aforesaid considerations. Decisions on morality and ethics cannot, therefore, be based on any single consideration, because it is most probable that no one stand would capture all the aspects of moral reasoning that one must take into account to come to the conclusion if an act or response has been moral and ethical. As far as utilitarian moral standards are concerned, they basically deal with issues of overall social welfare and benefits, and are not focused on individuals or about how the benefits are distributed. Interests of individuals are taken care of by rights (moral rights) as discussed earlier, but it is not quite explicit how benefits and burdens are distributed. Moreover, moral rights do not take into account the aggregate well-being of society. Moral rights are closely interlinked with duties. To distribute benefits and burdens, one has to consider the reasoning for distributive justice, but this ignores social welfare. The purpose of distributive justice is essentially to ensure consistency in the way one should treat similar situations. There are other types of justice —retributive justice, compensatory justice, etc.—but their scope is related to some special situations. Ethics of caring, on the other hand, consider how those who we are close to, or the

Ethics in Business and Corporate Governance

relationships that we value, can be treated differently to protect and preserve these bonds. This, however, offers scope to partiality, whereas justice demands impartiality in action. Thus, reasoning based on all the moral considerations may not lead to a single-point decision about ethics. What would be necessary is the analysis of a situation or an event with respect to all four types of moral considerations, though one or the other may turn out to be more relevant and appropriate to arrive at a decision. This situation will call for careful analysis of facts and factual happenings with respect to questions that concern all types of moral considerations. These questions or probes must consider the utility and injury of an action, protection or violation of moral rights and correlated duties of those who are affected by the decisions, whether justice is being meted out with regard to distribution of benefits and burdens, and the scope of care for the well-being or mitigation of the sufferings of individuals who should be cared for as per the rules of ethics of care. However, to arrive at the correct decision on the morality of an issue or event, what is more relevant has to be determined, i.e., all four moral considerations should not be treated as equally important, each has to be assigned significance as per the importance of the specific situation. For example, in dealing with social benefits, distribution of scarce resources, and public resource utilisation, the theory of utility should be given more significance than others. Similarly, in the case of an individual who is denied education or certain aspects of constitutional rights, priority should be given to protect his rights, notwithstanding how others may stand to lose or get reduced benefits by such an action. In fact, moral rights and justice occupy higher priority in arriving at the morality or ethics of a decision; at times, though, one may be guided by the theory of care in situations where close relatives or friends are likely to be affected by the decision. The latter is particularly important when examining actions in a family-owned or privately-held business during resource allocations or in dealing with close relatives or friends. These considerations call for a fresh view of the cases citied earlier; each example can be analysed with respect to the said four moral considerations so as to arrive a conclusion about its morality and ethical correctness. Generally, there are three steps to ethical analysis, they are: (i) gathering factual information which is relevant and appropriate to the case; (ii) analysing facts using the norms of ethical reasoning of utility, rights, justice and care; and (iii) making a judgment whether the act or decision is moral and ethical. Figure 2.4 represents a way of looking at an issue with a view to judge morality and ethics. Here, it should be noted that moral philosophers do not lay down any fixed rule to determine the morality and ethics that can be applied uniformly; examples discussed earlier were only to guide people’s thinking about morality and ethical correctness. The problem arises when utilitarian considerations become a hugely dominating factor in an issue wherein some rights have been infringed, justice has been marginalised or the ethics of care have been overlooked. Take, for example, the case of acquiring agricultural land for industrial use. It is necessary to evaluate the exact benefits and burdens of the utilitarian approach to this issue and the extent to which it benefits the society in the long term vis-à-vis the extent of infringement of rights or the demands of justice and care. In certain issues, the utilitarian decision may sufficiently benefit the society or a larger number of people, which will justify overruling those rights that are in conflict with the decision.This explanation is forwarded by sociologists in India who favour the reservation of seats in educational institutions for the backward community. Similarly, hugely

Principles of Ethics 1.

Gather facts and information about the issue at hand. These should be factual and relevant to the issue.

2. Apply moral standards:

A. Does the action or decision maximise satisfaction of all constituencies? [Utility] B. Does it respect the rights and duties of individuals affected or involved? [Rights and duties] C. Is it consistent with the rules of justice? [Justice] D. Is it consistent and in agreement with the responsibility of care? [Ethics of care]

3. Decide on the weightage as per the situation—keeping in view that moral rights cannot be taken away and justice must be equitable.

4. Apply moral judgment:

If no on all standards, the issue is not moral and ethical. If yes on all count, the issue is ethical and moral. If yes on utility but no in moral rights, it is not ethical. If yes on rights and justice, but no on others, it is ethical. If yes on care only and no on others, it is not ethical.

Note: These relationships only offer a general guideline; exact judgment will depend on the specific situation and weight of a moral consideration that the issue at hand demands

Figure 2.4 Steps in Moral Judgment

beneficial utilitarian benefits may also allow some infringement into the principles of justice or demands of care. Likewise, there could also be a situation when the consideration of justice to a larger group may allow overriding individual rights, or when the demands of caring may become more urgent and important than holding onto the principle of justice. The criteria of judging ethics, therefore, still remain personal where an understanding of the moral standards and moral reasoning can be the sole guiding factor, thereby mostly depending on those individuals who are taking the actions or decisions. Thus, determining the morality and ethics of actions in business depends on the concerned individuals—on their virtues and goodness of character in dealing with people and problems. Not surprisingly then, the quality of business processes largely depends on the quality of people an organisation harbours or promotes. Management specialists emphasise that the purpose of studying business ethics is to develop better human beings—with moral values and character—who are essential for the support of ethical business practices and environment.


Ethics of Virtues

This brings us to virtue ethics.Virtue is a quality embedded in the personality of an individual, and is expressed in his or her habitual behaviour. Therefore, understanding what constitutes

Ethics in Business and Corporate Governance

virtue, and its expression in ethical actions and decisions, becomes an essential feature in the judgment of morality and ethics. However, the ethics of virtue is neither an alternative to the moral principles of utility, rights, justice and care, nor an additional factor in judging morality, i.e., it is not a test for morality and ethics in the way utility, rights, justice and care are. Ethics of virtue complement and add to utilitarianism, rights, justice and care by looking not at the actions people are required to perform, but at the character they are required to have. It is not the performance that counts here, but the quality and character required for the performance.The role of virtue is to provide a distinctive insight into the ethical perspective of an issue. The theory of utility, rights, justice and care approaches ethics through an evaluation of actions; whereas virtue of ethics facilitates ethical behaviour and action through the characteristic behaviour of the decision-makers. Some examples of virtue are: honesty, integrity, trustworthy, truthfulness, courage, etc. Unlike height, beauty, health, intelligence, etc., virtues are not natural characteristics of a person; a virtue can be developed and nurtured in a person through efforts and desire, and is expressed in his or her general behaviour and habits.Thus, a moral virtue is an acquired quality that is praised and valued as a part of a person’s character. It is indicative of good moral character. A person is said to have moral virtue when he or she behaves habitually in the way that is valuable to the society, and he does so with reasons, feelings and desire. For example, an employee with the virtue of integrity will habitually behave so as not to allow any compromises in his duty and responsibility—not even with the lure of personal gains—and will do so because he believes in the cause of integrity and honesty at the workplace.Virtues are ingrained into one’s habits and behaviour; freak or random displays of virtuousness, owing to lack of opportunity or under fear or under pressure, are not considered as virtue; such forced displays of virtue do not serve any purpose of ethics. Aristotle said that moral virtue is a habit that enables a human being to act in accordance with the specific purpose of being human. In his view, the most distinguishing characteristic of human beings is the ability to reason, which enables a person to lead life in accordance with those reasons. This ability to reason enables people to make a choice—good or bad— and to strike a balance by guiding him to act, behave, express or desire what is reasonable. When this act of balancing is blended with moral virtues, the act or desire becomes more reasonable and ethical. Ancient philosophy supports many views of virtue, but most philosophers held the view that moral virtues enable people to follow reasons in dealing with their desires, emotions and actions, and these reasons are based on the considered view of utility, justice, rights and care. Virtues are enablers for dealing well with the social and personal duties and responsibilities. Aristotle held the view that by articulating moral virtues, people articulate those habits and traits that allow them to lead good and useful lives. From this standpoint, philosophers hold that there are four classical virtues: courage, prudence, justice and temperance. Most virtues—sometimes called the value system of a person—arise from these classical virtues. For example, courage is the mother virtue for someone with honesty and truthfulness; integrity comes from prudence. Virtues like faith in God, religiousness, philanthropy, charity, etc. are no doubt valuable in a society, but these are more specific to a kind of living, and, when it comes to the practice of ethics, may not have as much implication as classical virtues. For example, some religious practices may not preach equal rights between men and women, but, nonetheless, possess and profess virtues of faith and charity. Perhaps there is no simple way to classify all types of virtues; but, with regard to

Principles of Ethics

ethics, there is no disagreement that moral virtues are dispositions that help human beings in favourably and desirably coping with the situations of life. Some important ethics-related virtues that make for a good individual or a successful manager are courage, prudence, wisdom, justice, fairness, temperance and intelligence. How, then, do virtues help in ethical behaviour and practices in business? As has been mentioned earlier, virtues enable us to hold onto certain moral principles which are essential to sustain an ethical society and business environment. For example, courage helps us adhere to moral principles (what we believe is moral) even when the fear of consequences may tempt us to do otherwise. The virtue of justice makes us hold on to all that is just and fair, even under unfavourable circumstances. However, moral virtues and moral principles often serve each other’s purpose, i.e., they act as trigger points for each other in developing the necessary traits and virtues. For example, when one is guided by the moral principle of utilitarianism, he is required to develop the virtue of kindness and generosity. Similarly, when guided by the principle of justice, one is required to develop the virtue of prudence and wisdom. Thus, ethics based on theories of moral principles and ethics based on moral virtues are complementary to each other. In other words, ethics of virtues will not advocate an action that is not agreeable to ethics based on moral principles.The difference is, ethics of principles manifest in actions and decisions whereas ethics of virtues are primarily indicated by the disposition of character. But both address issues or actions from the viewpoint of morals and principles so as to bring about equity, justice, fairness and care. To be ethical in practice, individuals concerned with the authority and responsibility of actions need to possess moral virtues that reflect their good feelings, fair reasoning, positive deliberations and just action. Many management scientists claim that disposition of moral virtues is an ingredient that is essential for ethical and effective management. Thus, judging morality and ethics is not simply a linear equation of the principles of utility, justice, rights and care alone. In fact, there is no fixed rule to arrive at a conclusion when an action should be considered ethical. The judgment would depend on the situation, purpose, extent of influence and impact on the society, and the weightage of moral standards one attaches to the incident or action. It is in this context of the role of an individual’s approach to ethical issues, that the moral virtues of that individual become important. Because, it is difficult to completely take away the human and spiritual touch from the process of reasoning. Thus, ethics of virtues make for the moral character required by an individual to act ethically. It must also be appreciated that business relies on the individuals (e.g., Executive, Sales Manager, etc.) for decision-making, while an individual is a product of his upbringing and religious beliefs —upon which some of his or her virtues are built. As a result, the religious/spiritual belief of managers and owners may lead to actions and decisions that otherwise meet the unwritten ethical standards of the religion or local community.To summarise, while morality and ethics of an issue can be judged by the conformance of actions to different moral considerations (utility, justice, rights and care), the approach may differ based on the virtues and (religious) beliefs of individuals taking the decision. As a result, the net effect of an action can have different implications in different situations, societies, places and circumstances. This requires individuals to reason, feel and deliberate to offset any imbalance or over-reaction pertaining to a situation for the action to be ethically correct. This, in turn, calls for moral character and certain virtues

Ethics in Business and Corporate Governance

so that the decision-maker gets a proper perspective of the situation and acts appropriately and ethically. In this context, it is necessary to note that the values and virtues enshrined in our country’s Constitution could be a source of ethical inspiration and decision, and they are: secularity, social justice, tolerance, equal opportunity, equality of sex, and equality of cast, creed and religion. A business should manifest these virtues and values in its conduct to be adjudged as being ethical and fair.

Summary 1. This chapter aims to introduce ethical principles and dimensions with a view to bring about awareness about tasks and responsibility. 2. The chapter discusses with examples the principles and elements of ethics and moral behaviour—in terms of rights, duties, justice, fairness and care—to provide the general dimensions of ethical issues. 3. It illustrates that most issues in business, pertaining to ethics and moral behaviour, arise from the concept of rights, justice and fairness of dealings with different stakeholders. It emphasises that ‘ethics’ are embedded in the inherent concepts of rights, duty, care, justice and fairness, i.e., the adherence of our decisions and actions to these principles is the measure of ethics. 4. The principles of ethics also require the application of moral reasoning to satisfy the guidelines of rights, duty, justice, care and fairness of actions. Ethical practice of business must, therefore, ensure reciprocal rights and correlated duties of parties involved in the business. Actions emanating from such practice should also stand the test of justice, fairness and care. 5. The term ‘moral’ simultaneously incorporates ‘utility’ of an action in the greater interest of the people. ‘Fairness’, closely associated to care, is an important criterion to decide if an action or decision has been ethical. 6. There are four basic types of moral theories in ethical practices: (1) The utilitarian theory; (2) Theory based on rights and duties; (3) Theory of justice; and (4) Ethics of care.These theories have been discussed with illustrations so as to establish what is moral and ethical. 7. The basic approach of the utilitarian theory is to choose plans, programmes and actions of any organisation with a view to produce the greatest net benefits for the greatest number of people associated with the business—including the society. In the process to determine net benefits, all the costs and benefits (or burdens)—financial or otherwise—should be taken into account. The approach of utilitarian theory is to expand the scope of ethics and to safeguard society against a partial view of the cost-benefit analysis. 8. The theory of rights holds that all people have some basic rights, and that these rights are concerned with the power of an individual to choose, pursue and protect his or her interests. All such rights are associated with correlated duties; when a right arises from some legal provision or social convention, it becomes a moral right. 9. In business, ethics demand that all interested parties are given opportunities as per their rights and duties. However, moral rights are not without correlated duties by the employees or members of a society. The theories of utility, rights, duties and justice are the polar direction to judge the morality of a decision.

Principles of Ethics

10. The concept of utilitarianism has been discussed to determine the ethics or morality of an action—be it in society, business or economics. Utilitarianism comprises: inclusiveness of all stakeholders, the net-benefit concept, and the consideration of alternative that produces the greatest sum total of utility. Inclusion of these features in the assessment of ‘utility’ adds great value and sense of justice in determining ethicality of actions and decisions. 11. To overcome the limitation of utilitarianism in dealing with moral issues relating to rights and justice simultaneously, ethicists also prescribe the ‘rule of analysis of utility’ which states that, in order to determine if an action is ethical, one should not only consider the greatest amount of utility, but also whether that action is required in keeping with the correct moral rules that should be followed, including by one’s self. Correct moral rules do not support any activity that causes or aggravates the sufferings of a large number of people, and which cannot be compensated by financial benefits alone. 12. The process of determining ethics of an action calls for judicious analysis of facts (factual data and circumstances) after considering: (a) the utility and injury of an action; (b) protection or violation of moral rights and correlated duties of those who are affected by the decisions; (c) if justice is being meted out with regard to the distribution of benefits and burdens; and (d) the scope of care for the well-being or of mitigating the sufferings of individuals who should be cared for as per the rules of ethics of care. 13. The chapter ends with a discussion on the role of ‘virtue’ in making an ethical decision; virtues provide an ethical perspective to a given issue or situation. The theory of utility, rights, justice and care approaches ethics by evaluating actions, whereas virtue facilitates ethical behaviour and action through the characteristic behaviour of its decision-makers. Both are important while arriving at a decision about what is moral and ethical in a given situation.

Key Words and Concepts Ethical principles, utility, rights, duties, justice, fairness, care, theory of justice, ethics of care, utilitarian theory, utilitarian principle, rule of utilitarian approach, virtues and values, rights of possession of properties, utilitarian principle of judging ethics and morality, correct moral rules, rule-utilitarianism, utilitarian moral standards, ethics of caring, virtue ethics, egalitarianism, distributive justice, moral virtue, courage, prudence, temperance, nothing ethical about ethics, rewarded for failure.

Exercises Check Your Progress 1. The subject matter of judging ethics in business is complex, approached not only by the reasonableness of an action and moral reasoning but also by the ___________ 2. The study of business ethics must examine how to determine that an act ___________ 3. The utilitarian principle holds that an action is right from an ethical point of view if and only ___________ 4. Correct moral rules cannot support any activity that ___________

Ethics in Business and Corporate Governance 5. 6. 7. 8. 9.

Every right of a person (or an organisation) is associated with the performance of certain ___________ Kant’s principles state that ___________ Justice demands ___________ ‘Ethics of caring’ is primarily concerned with the concept of ___________ Justice may take different dimensions in different circumstances; in one situation it may be concerned with ___________ and in another circumstances it could be ___________ 10. Aristotle held the view that by articulating moral virtues ___________

Review Questions 1. Which elements of ethics should be examined to ensure ethicality of a decision or action? 2. Briefly outline the following concepts: utilitarianism, rule-utilitarianism, moral rights, contractual rights, correlative duties, distributive justice, egalitarian justice, compensatory justice, ethics of caring, and ethics of virtue. 3. Critically discuss the role and usefulness of the ‘utilitarian theory’ in assuring ethics and morality in the society. What are the limitations of the utilitarian approach? 4. What do you understand by ‘correct moral rules’ as per the ‘rule-utilitarian theory’? Discuss the steps in analysing whether a decision is fulfilling the correct moral rules. 5. Differentiate between ‘legal rights’ and ‘moral rights’. Discuss, with illustrations, how rights and duties regulate our ethical behaviour in a group. 6. Critically discuss the concept of ‘justice of fairness’ as forwarded by John Rawls. 7. Justify the statement: for ethical fairness, enforceable contractual rights and duties for performance should be read in accordance with Kant’s approach to morality and equality. 8. Outline the steps of ethical analysis while judging the morality and ethical correctness of an action with reference to different ‘moral considerations’. 9. Many ethicists complain that ‘ethics of caring conflict with morality’. Do you agree? Elaborate your answer with illustrations. 10. Discuss the implications and usefulness of ‘virtue ethics’ in ethical behaviour and practices in business.

Further/Suggested Reading 1. Ethical Theory and Business; Tom L. Beauchamp & N.E. Bowie (Eds.), Prentice Hall, New Jersey, 1979 2. A Theory of the Good and the Right; Richard B. Brandt, Oxford University Press, New York, 1979 3. Utilitarianism: For and Against; J.J.C. Smart and Bernard Williams, Cambridge University Press, London, 1973 4. Utilitarianisms and Beyond; Amartya Sen and Bernard Williams (Eds.), Cambridge University Press, Cambridge, 1982 5. A Theory of Justice; John Rawls, Harvard University Press, Cambridge, 1971 6. Business Ethics; Thomas M. Garrett, Prentice-Hall, New Jersey, 1986 7. Immanuel Kant’s Moral Theory; Roger J. Sullivan, Cambridge University Press, New York, 1989


Chapter Objectives

Law, Ethics and Business To highlight the scope of and difference between law and ethics in business To understand the role of ethics vis-à-vis law in business To highlight and illustrate different ethical and legal issues in business with regard to their internal and external environments To demonstrate the compatibility of ethics with the purposes of business To discuss the role and scope of business ethics vis-à-vis business operations To discuss and establish the mode, modalities and responsibility for ethics in business To highlight the critical aspects of ethical decision-making in business

Ethics in Business and Corporate Governance

INTRODUCTION ance ern ce Gov ernan ate Gov nance por Cor porate over ance nd s a d Cor orate G overn nce nes usi ess an Corp ate G erna B ov or n and Corp ate G s in Busi s ic nes and or Eth ics in usi orp s Eth s in B usines and C ic s B Eth ics in usines Eth s in B ic Eth

Law, Ethics and Business

1 articleshow/3849039.cms, accessed on 30 September 2011 2, accessed on 30 September 2011 3, accessed on 30 September 2011

Ethics in Business and Corporate Governance

of trusteeship (in conducting the business for and on behalf of its investors), and a complete lack of ethical governance. Ironically, the basics of ethics were totally ignored by a company that was awarded for good governance in the country. All controls, regulations and laws meant for fair practices and ethical governance proved hollow when people managing the company chose to be dishonest. Such failures, common in many parts of the business world, only go to show that unless people behind the business are not honest, moral and ethical, no amount of law and regulation can assure ethical business practice and governance. As against this backdrop, it is essential that business process and practices must be morally correct, fair to the people connected with it, adhering to legal requirements, and upholding certain ethical standards. If business is seen as an economic instrument for a nation’s socio-economic development, then that business has to abide by the law of that land as well as ethics; they are both relevant to business for its long-term success and prosperity. While law is an old-established institutional system of providing justice and fairness to people in society, interjection of ethics for fair-play in business comes with training people in moral education, developing moral attitude and obligations amongst people, promoting ethical culture, commitment and orientation in the organisation, and establishing ethics and justice as ‘rights’ in the organisation. The relevance and role of ethics in business and society, in addition to laws and regulations, has long been recognised by society and the authorities. The history of development and progress of business across the world shows that ethical crises have been at the root of all economic downturn and recession. Business enterprises failed to create value in the system each time they deviated from the path of ethics and ethical responsibility to their stakeholders and society. The necessity of ethics and its role can, perhaps, be best summarised by following the words of S.H.Venkatramani, a noted proponent of ethics in business: ‘At the end of the millennium, we are back to basics. As society appears to be getting increasingly corrupt and criminal, many are beginning to realise that you cannot aspire to create value without deeply cherishing a sense of values.To add a lot of interest to your principal, you need to stick to your principles.To sustain your competitive advantage in an increasingly competitive corporate world, you need character. Morals are more important than money, materials, marketing and management. Hence, Indian business houses are witnessing a resurgence of values and ethics that may, in the long run, help turn the tide of recession, and lead to continuous growth’. He saw ethics as the saviour of business from the cyclical and periodical falls that we often encounter, and hoped that resurgence of ethics will change the future Indian business scenario.Yet, history of financial greed and breach of ethics has repeated itself first Enron and then Satyam showing how deep-rooted the vice is. Nonetheless, challenges of institutionalising ethics in business operations, alongside the law, must be pursued with greater determination and vigour in order to ensure that business enterprises can fulfil their social and economic roles of creating wealth and well-being of the society and the nation.The purpose of business is to create prosperity of stakeholders and value in our socio-economic system. In this endeavour, both law and ethics must play their specific roles and support each other for fairness, morality and justice in the business dealings and operations. This chapter, therefore, discusses the role of ethics vis-à-vis laws; special features and ethic-specific situations of business; and the mode, modalities and responsibility for ethics in business.

Law, Ethics and Business

3.1 LAW AND ETHICS IN BUSINESS In business it is often asked: Is it not enough that, to be ethical, people merely follow the laws? There are numerous laws and regulations that govern the conduct of business, yet there are many fraudulent practices and huge losses to public due to unethical business practices. Referring to the earlier case, apparently SCSL had not followed rules and laws of business and, yet, was awarded for ‘best practices’ in recognition of excellence in governance. It was not until 2008 that its fraudulent manipulation of books of accounts and unethical business practices were made public when the company tried to divert huge amount of money to other family businesses, violating moral standards and ethical norms of business practices. Initially, public, investors and the society were drawn to the affairs of this so-called reputed company that had violated ethics in corporate governance. Law enforcing authorities and regulators stepped in and acted soon thereafter; but it was too late to prevent the loss to SCSL’s investing public and to the image of Indian business. Even in other corporate collapses of the past, unethical corporate governance has been the primary signal to a possible scam and immediate trouble for investing public. While the law may take its time to act, ethical failure in governance and management immediately and seriously affect the market confidence, financial viability, customer support and the company’s image at large. Laws are important regulators in business, but have their own procedural limitations. Ethics, on the other hand, are a self-regulating mechanism based on one’s moral values, moral principles, moral standards and a sense of moral responsibility towards the others involved with the business. Ethics make for an instrument for successful management of a business and for the well-being of its stakeholders and the society—both pillars on which the business stands and operates. Ethics are applicable to business, regardless of whether the business is big or small. There are many instances when the law alone may have been unable to stop the damage to public or society, but, in some of these cases, the call of ethics have been able to minimise or prevent the loss and suffering. This can be made clear through the simple instance of buying household goods that we use in our daily lives. While this example may be trivial in view of the larger national issues that a business can influence, it goes to demonstrate how ethics in business dealings can bring happiness and satisfaction for all concerned—when law is somewhat limited in taking action. The example is as follows: A person, having relocated to a new city, went to a nearby white goods store to buy a refrigerator. The dealer of that store was in a hurry to clear his stock, and sold him the refrigerator knowing that it was defective. The dealer argued with his self that the product was covered by a warranty and could be sent to the manufacturer for repair or replacement, if and when the customer brought it back. The latter made his purchase in good faith, but, on installing it at home, realised that the cross-flow mechanism of the refrigerator was not functioning effectively. When the buyer complained to the store, the dealer expressed his ignorance and offered to rectify the product under warranty. The buyer was upset with the dealer’s attitude, and decided to take legal action against the store. But, when the lawyer asked for proof that the dealer had sold the product knowing it was defective, the dealer (falsely) stated that he was unaware of the defect in the product when he had sold it. Furthermore, he offered to repair the refrigerator under the warranty.

Ethics in Business and Corporate Governance

Here the law may appear helpless, considering that the buyer ought to have inspected the product before purchasing it. And, to protect the buyer from any loss, the law of sale of goods makes provision for product warranty. However, what this system fails to note is that the whole process of claiming warranty is not only inconvenient for the customer, but he also suffers the loss (of service related to the purchased item) for that period—despite having paid for it in full. In such situations, the law, especially consumer protection laws, offer scope for compensation and damage, although the loss or suffering cannot be prevented completely. In this case, only ethics could have prevented the suffering of the buyer. Ethics and ethical standards of practice in the store would have prevailed upon the dealer who would then have refrained from entering into such an unfair deal (when he knew that the product was defective), wherein the customer suffered for no fault of his. The dealer’s sense of moral responsibility and ethical standards could have stopped him from harassing the customers. If moral guidance and ethical principles were upheld in this case (by stopping the dealer to sell a defective product knowingly or making him to replace the defective product by taking urgent measures), the outcome would have been satisfying and happy for both the buyer and the dealer. In fact, dealer would have gained more by increased business due to ‘goodwill’ creation.

This scenario of customer sufferings is also common to India’s real estate sector, given the customer enthusiasm for residential and commercial property, and the huge number of small and big players in the field. Though there are laws to deal with crime and fraud even in this sector, in most cases they are unable to stop or prevent the harassment of customers—unless builders or property agents themselves choose to act ethically. Thus, at times when the law alone is not enough to protect customer or public interest, the conjoined forces of law and ethics yield better results. For ‘good effect’ on business and its clients, there is the need for both law and ethics. Just as following ethics may not necessarily tantamount to obeying the law, obeying or being guided by law may also not always be enough to be ethical in business or dealings. With reference to the example cited in the earlier chapter, when the government acquired agricultural land for industries, ethics and ethical duties called for more benefits for the farmers than what the law would prima facie be satisfied with. Ethics and compliance to ethical standards in business not only work to prevent damages to the interests of people and society, by taking broader issues into considerations, they also help in furthering the interests of business by creating goodwill and customer loyalty—which laws fails to do in many instances, despite similar aim and intent.Thus, ethics can make very good business sense for well-rounded success. Ethics span wider social issues by addressing the (self-imposed) moral responsibility of an action or decision taken either by individuals or a company.The ethical standards of an individual are not established by any law-enforcing authority, but are arrived at by one’s own judgement based on or guided by knowledge (understanding), logic, feeling, morality and conscience. Characteristically, ethics are a self-evolving voluntary mode of moral behaviour in a society. If, at times, the law and morality may coincide, then obligation to obey such laws becomes the

Law, Ethics and Business

same as the obligations to be moral. For example, in business or in society, laws that prohibit theft, fraud, murder, rape, etc. are legal as well as moral. However, law and morality do not—and need not—always coincide. There are laws that have nothing to do with morality, on the one hand, and then there are laws the violation of which hurt or affect moral standards (e.g. laws against discrimination based on cast, gender, religion, colour, etc.). To elaborate this, we cite the recent move by the Human Resource Department (HRD) Ministry of the Government of India, to provide a quota of reserved seats for backward classes of society, for higher education. India’s HRD Ministry drew severe criticism for the bill4 as it effectively allowed more than 50 per cent reservation of seats in colleges and other academic institutes, when considered along with other such policies, thereby severely limiting the scope for meritorious students from other classes of society. While many felt that it was not morally justified, the government, in a bid to encourage and uplift the weaker sections of society, went ahead with the reservation bill.

This move contradicts the law of equal opportunity to all (meritorious) students, and limits the scope of their livelihood as per their individual natural potential. Hence, such a move can be imposed by the government by means of the law (or by enacting one), but not by moral reasoning. Even when certain special circumstances of the backwardness of a community are invoked, moral reasoning will call for an inquiry about: (a) the evidence that such a move has helped the community in the past; (b) the facts about other impediments to the progress of that community; (c) whether the move will unduly damage the interests and rights of others affected by the decision and its future influence; and (d) if the decision can be consistently applied to all cases. To morally justify the actions, the reasoning of the government must be logical; evidences must be accurate, relevant and complete; and the moral stand taken should be consistent with the social context and the environment. The government also has to examine if the stand taken, or the law or its enactment, will bring greater benefit to a greater number of people in the society, i.e., whether the society as a whole and the nation would benefit by that action. Additionally, the process of justification must also consider the elemental issues of ethics, namely: utility, rights, duties, justice and care. Therefore, at times, what the law intends to accomplish may not be justifiable with ethical reasons. In contrast, the enactment of a law for the purpose of interpreting that law with regard to a specific situation (in a court of justice) would uphold the spirit of natural justice and moral philosophy of the law. While moral standards are not subject to authoritative sanction, laws are subject to legal interpretations. In that, moral standards are flexible and subject to good moral reasoning by the self or the person taking action. As has been mentioned earlier, validity of moral standards rests on the adequacy of moral reasoning for an act in order to support them. If one can ethically reason with the self and others for the actions taken, then his or her grounds remain valid as ‘moral’ and will stand the test of ethical behaviour—provided the action was not intended to harm the interests of others concerned. However, application of ethical reasoning to 4, accessed on 7 October 2011;, accessed on 7 October 2011

Ethics in Business and Corporate Governance





Figure 3.1 The Balancing Forces of Business: Law, Ethics and Governance

find whether a company (or institution) or its employees have violated moral standards, needs further examination even with regard to the provisions and the role of law in the business practice. In this respect, obeying the law of the land is a part of the test of moral standards. Law, ethics and governance are the forces that keep a balance between legality, morality and profitability of business objectives (Figure 3.1). In the context of law and ethics in business, it is necessary to further examine: (a) how laws act in business; and (b) how ethics help in conducting good business. As discussed earlier, the law treats modern business organisations as ‘immortal fictitious persons’, who have the right to sue and be sued, own and sell assets and properties, carry out business on behalf of others and self, enter into legal contracts—all in their own name. Every country has laws to govern and control the conduct of business.Yet, who should the law-enforcing agency hold responsible in case of failure of compliance with these laws? The company is a ‘fictitious person’; hence cannot be factually arrested or jailed for a crime. Therefore, both law and ethics take cognisance of the person or group that acted in defiance of that responsibility. Generally, the chief executive of a company or a key managerial authority, who has major control over the company’s activities, is held responsible for any violation of law, unless the company has, in its memorandum, specifically deemed any other person for that specific responsibility.The Companies Bill or Company Laws governing the business affairs of a country often define a set of ‘key managerial persons’ who are responsible for the company’s legal compliance. However, if there is strong evidence that some other person, not included in that list but in an otherwise influential position vis-à-vis the company, has propagated or caused the decision in violation of law or regulations of the company, then the law will also act upon him or her. Let us illustrate this point through the case of Union Carbide, in Bhopal: When the ill-fated Bhopal Gas Leak tragedy5 occurred in 1984 in the manufacturing plant of M/S Union Carbide Ltd.—a company incorporated in USA—its Chief Executive—though a US national—was sued by the Indian court of law. [This industrial disaster was caused by

5, accessed on 30 September 2011; and Business%20Ethics/BECG009.htm, accessed on 30 September 2011

Law, Ethics and Business

the accidental release of large quantity of methyl iso-cyanate (MIC) from the Union Carbide India’s pesticide plant located at the heart of Bhopal. The accident killed over 20,000 people and blinded many more in the locality.] Likewise, when a worker dies due to an accident inside the factory premises, because of company’s negligence, the chief executive of the works, named by person, could be held responsible for the cause of the accident, provided, however, that the company has not named anybody else for such responsibility. (In this context, it is to be remembered that an organisation is treated by the law as ‘immortal fictitious persons’, and it functions through the people it employs for specific purposes and accordingly delegates responsibility and accountability. As a convention in business management, the chief executive is the sole person to whom the owner or the board of directors delegate the total responsibility for the operations, and CEO, in turn, may delegate some of the other specific responsibilities down the line with accountability to some key managers]. However, in the Satyam case, though the managing director (MD) was present in the board meeting, the decision to fraudulently bail out two family-run businesses by diverting SCSL funds was the brainchild of Satyam’s promoter-chairman and his brother (MD)—despite the reservations of other directors. On investigating, when strong evidences for scam and fraud emerged against these two individuals (the promoter and his brother), the law was quick in taking them into legal custody. The board had failed to prevent the fraud and was immediately dissolved; and the conduct and role of other directors—including ‘employee directors’ and ‘independent directors’—was further investigated.

Thus, the law is enforced in business by holding those individuals accountable who the company has deemed responsible and accountable for its business; unless some other individuals had deliberately and directly acted or colluded to cause the damage. In the case of Satyam, many believe that the fraud could not have gone undetected and for such a long period of time without the collusion of other authorities in the company or society. Accordingly, current investigations are probing to identify such outside personnel so as to ensure appropriate legal action. However, in a standard business practice, it may be argued that the employee is hired to further the cause or profit of the business. Hence, he or she should be loyal to the employer or owner and abide by his or her directions. Here, only the employer or owner should be treated as responsible for any accident or lapse. While it may be easier to trace the ownership in a small and privately held company, it is not always easy to do so in a modern limited company wherein the shareholders—often very large in number—are treated as true owners. Hence, in the eyes of law, the person or persons responsible for directing and supervising the company’s work are made responsible for the consequences of the company’s action. Despite this clarity of responsibility, one may question: Should the employee be loyal to the employer and do as they are asked without any considerations to legality or morality of an issue? Will a person bother about being legal or moral in his pursuit for financial gains of the company? These are important issues in dealing with business ethics and law, and should be critically examined and clearly understood before proceeding further.

Ethics in Business and Corporate Governance


Employer–Employee Obligations for Ethics and Law

Employees are duty-bound by an employment contract, to be loyal, obedient and maintain certain confidentiality at work. Does this mean that an employee has to perform whatever he is asked to, by his or her employer? The answer is ‘no’; it is not necessarily obligatory for the employee to obey the command of the employer if that command is not reasonable, moral and legal. Laws governing a company’s operations provide that, in determining whether the order of the employer (or of the person commanding that service) is reasonable, the rules of ethics as applicable to a business and profession should be considered. And if the job which he or she has to perform is illegal, immoral or unethical, an employee is not duty-bound to do it. Thus, in no event of business performance it can be implied that an agent or employee has a duty to perform acts that are illegal, immoral or unethical. The manager’s duty to serve his employer is, then, limited by the constraints of morality. This is an important ethical principle that influences both, the reciprocal obligations of employee and employer, and their individual choices of behaviour in business. Let us apply this principle to the example of managing a ‘Chit Fund’ to examine how ethics can be influenced. A large number of people lost their money due to failure of companies like the Sanchaita Chit Fund6a (early 1980s) and Abhinava—a teak plantation6b business in the 1990s), although these companies were (and are) established under the provision of laws. Such cases where unsuspecting investors lose their life’s savings in chit funds or other dubious NFBC (NonBanking Financial Company) business are not uncommon in India. These companies advertise in local dailies or appoint agents or managers in various regions of the country who make door-to-door calls for investments offering attractive financial terms. Respective sales agents convince people that their schemes are good investment opportunities. Often, as a ploy to gain investor confidence, most of these companies actually deliver the promised terms or returns—but only in the initial periods. Gradually, the companies start siphoning the funds into other accounts—somehow escaping the scrutiny of the law—and thus start defaulting on their payments. Then, as if overnight, the companies close the shutters across their various sales offices and vanish from the market—causing huge losses to the investing public. Mostly such scams go unchallenged in India because of procedural complications and delays in legal matters; some investors who move the consumer courts get their money after a prolonged legal battle, but it is usually too little and too late. Not surprisingly, resolutions in many such legal cases are pending in many an Indian court even today.6a&b However, such financial frauds are not confined to developing economies, but occur in every society. Very recently, Japan, one of the world’s developed economies, reported one such fraud engineered by a person named Kazutsugi Nami7—who set up a front company, L&G, and allegedly defrauded 37,000 investors of up to ¥126 billion. In a country where interest rates are abysmally low, his company lured the public by promising 36 per cent returns on their investments. Although L&G ultimately went bankrupt, along with it also sank the money of a large number of innocent investors. 6a, accessed on 15 November 2011, accessed on 15 November 2011 7, accessed on 7 October 2011 6b

Law, Ethics and Business

These fraudulent activities were conducted despite the fact that the respective countries had proper laws to administer business. The root cause of such immoral behaviour is the greed of individuals to make a quick buck, as it were, at any cost—including gross violation of morality and ethics. If people are made aware about the merits of ethical conduct, principles of morality, and the freedom to choose one’s action under the obligation of ‘constraint of morality’, then the possibility of such frauds would automatically reduce. In that case, the principle of morality would have—at the least—placed as much onus on the agent or manager (put in charge of collecting money from the people) as to think: (a) if the act is legal and moral; (b) about the choice of his or her decision; (c) the moral consequences of his or her act; and (d) his or her moral responsibility thereof. An awareness about the principle of moral constraint would have perhaps emboldened some of the collection personnel to refuse participation in those schemes or choose (or at least have the opportunity to choose) their own actions and make their investment deals more transparent to the public by clearly stating the risks involved. Thus, the damage to investors’ interests could have been minimised—when the law alone was unable to prevent their loss in time. Another aspect of this principle is that it imposes the constraints of morality, i.e., an employee cannot always plead ignorance for an immoral act and get away with such a deed.The principle puts both the onus and the consequences of immoral acts on the doer—because, in such situations, the principle of morality allows him or her to make a choice about the decision or participation in such actions. Business ethics decree that employers do not force their employees to do what they would not agree to do if they knew that it was immoral or had immoral consequences.They should be given the right to self-determine the morality of their tasks. If this process of self-examining what is ‘morally right or wrong’ can be instituted in the thinking and working of the employees, that may substantially minimise the risk associated with immoral and unethical activity in business organisations, which are always set up under the provisions of some laws. This type of ethical thinking and working is especially needed in the financial sector (banking, etc.) to prevent easy fraud. In a developing economy such as India, characterised by rate of inflation higher than that in a developed economy, there are many takers for attractive financial investments with high liquidity. Hence, numerous investment schemes are offered in the market—attractively packaged but with little credibility when it comes to the companies offering these schemes.The companies are mostly established under the provision of laws. In such circumstances, what can actually make a difference—between good and harmful practice (i.e., practice with intent to cause harm)—are the ethical standards of a company’s business practice and the consciousness of its employees about their moral responsibility to the public and society. Therefore, in order to protect the society from such damage, it is necessary for ethics to join hands with the law. This exemplifies the complementary role of law and ethics in maintaining fair business practices. In a business, all employees and professionals have the right to choose their tasks from the viewpoint of morality of the actions, and every business has the duty to ensure that no employee or professional is forced to do a job against his or her own accord and moral conscience. An employee is considered as being legally correct in going against the employer for a task that is immoral and forced upon him or her.

Ethics in Business and Corporate Governance

Generally, unethical jobs in a workplace are carried out with the help of professionals who are experts in their respective fields. In order to minimise the hazard of such business practices in society, many professional institutions and learning bodies enact their own codes of ethical conduct as guidelines for their affiliated members (this aspect is more elaborately discussed under the heading ‘Professional Ethics’). The purpose of this extra-legal enforcement of such a code of conduct is to ensure ethical practices in professional activities—making it explicitly clear that every professional, engaged in an unethical activity, should bear the responsibility for failing to be moral and ethical in his or her dealings. In other words, in business practices, professionals should not allow their self-interest to override the moral issues of their actions. The Institution of Engineers (India), Institute of Chartered Accountants of India, are some of the professional bodies that have created their own codes of ethical practice, as have many other institutes that span the work-areas of various business activities. Here, the idea is to make its members and followers aware and responsible for ethical behaviour in their business or profession, in addition to their solemn duty to abide by the law of the land. Thus, raising moral consciousness in a business or workplace can drastically minimise the risk or damage—that can arise from their unethical conduct—to people and society. In this context, with reference to the collapse of Enron, had the auditors at Arthur Anderson behaved ethically and upheld the moral standards and code of practice in auditing, as per the General Accounting Practice (GAP), in USA, and made known the true financial situation at Enron well in time, the financial disaster could have been averted. As has been mentioned earlier, mitigating factors like uncertainty, difficulty, and minimal involvement can—to a large extent—diminish a person’s legal and moral responsibility towards a corporate act.Yet, at times, determining the degree of truthfulness of an employee’s claim may be difficult because, more often than not, employees of large organisations follow documented procedures in a bureaucratic manner, and work in tandem and lineage. This may camouflage the ultimate outcome of an act as well as the person ultimately responsible for that act, due to overlapping professional responsibilities in the given working conditions. To ensure that their employees do not fall prey to any unholy alliances even under pressure, most big organisations or companies establish and are governed by a ‘code of conduct’. These companies also provide employees with appropriate channels to report illegal or corrupt practices.The code of conduct issued by a company is equally applicable to all employees and clearly states what is expected of an employee with regard to both legal and moral issues. However, in this case, any legal examination to affix responsibility is neither easy nor fool-proof. In contrast, a clearly drafted ‘code of conduct’ and ‘code of ethics’ may greatly aid the cause by making employees conscious of their moral and professional responsibility in addition to legal responsibility. Thus, employers cannot take advantage of their employees to further any immoral act in the company; have the responsibility of clearly guiding their employees about expected conduct and behaviour; and, in case of any dispute, the employee’s action should be judged as per (a) the principle of constraint of morality; and (b) factors of uncertainty, difficulty and minimal involvement. However, in business, the primary role of law and ethics is to prevent and control illegal, fraudulent and immoral acts, and not to find faults or loopholes in the law.Therefore, to further strengthen the enforcement of laws and moral behaviour in the company or organisation, there

Law, Ethics and Business

should be a system of internally auditing the individual and corporate conduct on a continuous basis. Audit, when conducted with proper objectivity and sincerity, is an effective tool for prevention and control. Thus, both employer and employees have the responsibility towards the ethical conduct of business, and to understand the consequences of their participation in any illegal and immoral act. Singularly, either the law or ethics may not always be adequate and effective in preventing any wrongdoing in an organisation, but jointly they can. Compliance with the law, along with conscious efforts made by individuals to maintain ethical standards in business operations and dealings can certainly ensure fairness, justice and equity for all stakeholders. The following section on ethics and law attempts to examine these roles further.

3.2 ETHICS VIS-À-VIS LAW In the words of M.N. Siddiqi, an Economics professor at the Centre for Research in Islamic Economics, King Abdulaziz University, Jeddah, Saudi Arabia, ‘Running parallel to the saga of economic progress there is another thread, the ethical imperative of doing things in a manner that does not harm others or violate social interests. Even though morality is a human need in the sense that man’s felicity and ultimately his survival depends on ethical conduct, in reality ethical conduct does not always prevail. Men misbehave. They act in immoral ways, one harming other. Some violate public interest. Ultimately these end up harming themselves too. This necessitated reminders and warnings and a reaffirmation of ethical conduct’. (Evolution of Islamic Banking and Insurance as Systems Rooted to Ethics, in New York, April 26, 2000 by Prof. M.N. Siddiqi) Governing the misbehaviour of people—be it in society or in business (the means to economic progress as meant by Prof. Siddiqi)—requires the institutions of laws as well as ethics. Ethics and law are not mutually exclusive; one complements the other when it comes to ensuring best practices in industries, business and professions. Together, they aim to minimise wrongdoing and maximise benefits from the business. Hence, wherever needed, our moral standards that determine ethical conduct are incorporated into the law. For example, crimes, bribes, gambling, smoking, obscene behaviour, etc., all of which are considered to be in violation of moral standards or can affect the morals of the society are covered by laws. The law has many dimensions that have evolved over centuries; yet, what is more relevant to ethics is the positivism of law, which implies that laws are made in accordance with socially-accepted rules, and as long as it is just and fair to the society concerned, it is a valid law. The purpose of legal positivism is to seek to enforce justice, fairness, morality or any other normative end of the society.Thus, legal positivism allows people and society to differ from legal obedience if the law is not fair and moral (i.e., ethical) to the society concerned. Therefore, it is no wonder that ethics permit and encourage people in an organisation to stand up against a moral violation or an act that is harmful to the society or is in defiance of the orders from superiors or the law. Upholding ethical practices and moral standards in business are a type of proactive response to the issues seeking justice, fairness and morality. Our sense of moral standard has often been the source of shaping new laws in the society to prevent wrongdoing or protect us from it. Thus, law and ethics have a close relationship, and it is agreed by all concerned that citizens and corporate entities have a moral obligation to obey the law as long as the law does not require the person to undertake

Ethics in Business and Corporate Governance

any unjust or immoral action in violation of ethical practice. This point can be explained through the example of labour laws governing a factory set-up: As per the labour laws, employees are duty-bound to discharge responsibilities assigned by the employer and to obey the orders of superiors; any refusal to do so may be treated as ‘indiscipline’. The question here is, can a manager or supervisor force a labourer to work in conditions that are extremely hot and humid and which may be injurious to health and safety? If, in this case, a labourer or the labour union stops work in the factory, can the action of that person or union be judged illegal? The answer is ‘no’; because, in the first place, it is unethical for the company or its representatives to force workers to work in an environment that is detrimental to health. Therefore, any denial to work in such conditions will not be considered illegal or unethical. Similarly, a superior cannot force an accountant (junior employee) to manipulate or understate account-figures for personal gains, and the junior’s refusal to follow any such instructions from the superior will be considered just and right. If, however, an accountant does comply with such an unethical instruction based on his own choice, he will be held responsible for the harm or damage caused by his immoral act, and will be subject to appropriate disciplinary action as per the rules and provisions of the company’s ‘code of conduct’.

Ethical reasoning and morality allow a person to act against the ‘service rule of obeying the superior’ or the law, if he or she has to do anything immoral in keeping with that rule. Conflicts between the law and ethics are often taken care of by the judicious interpretation of laws— when an attempt is made to examine not the explicit part but the implicit part of the law. Most laws are subject to correct interpretations, and, when rightly interpreted by taking in view the moral aspects and purpose, there is hardly any conflict between the law and ethics. Thus, moral justification and professional ethics are to be considered while serving the orders of an employer (or superior); in no event would it be implied that an agent or employee is duty-bound to perform acts which do not stand the test of reasonability, morality or legality. As has been mentioned earlier, an employee’s duty to serve his or her employer is limited by the constraints of morality. The principle of constraint of morality not only applies to individuals or groups, but also to a company and even to the government through its agents or principals. This is because laws and ethical principles of business are the outcome of the chosen behaviour of individuals—who may be the agents or principals acting on behalf of the organisation. Therefore, the action of those acting on behalf of an organisation, either business or government, must stand the test of morality if that has to be enforceable under the law. This principle of constraint of morality is illustrated with the land acquisition case (cited in Chapter 1): The law authorises the government to acquire land for a specific purpose which is also beneficial to the society—e.g. setting up an industry, constructing a road, etc. But, to acquire the said land, can the government affix its price arbitrarily? The answer is ‘no’; it must follow the ethical rules of good reasoning to ascertain the land-price, which should be just, fair and moral. An ethical examination of this issue should consider if the decision or action will lead to losses to the rightful owners, hamper their long-term interests and impair the well-being of

Law, Ethics and Business

the affected people. If the government fails in these tests of morality and ethics, people may disobey the order (owing to the principle of constraint of morality) and approach the court of law (authority) challenging the government order and seeking justice. It is then expected that the deal is examined with respect to governing laws as well as moral practices, the latter being concerned with protecting people from any harm to their rights, interests and wellbeing in the society and their environment. Here, justice can be sought under the scope of a public interest litigation (PIL), which examines the social and moral sides of the dispute—in order to arrive at a well-balanced and satisfactory solution to the problem.

Thus, the law of the land may prevail as a deterrent for wrongdoing, but ethics stand as the moral guard against what is unjust or unfair. Many a time, ethics may also hold a critical relationship with the law (through legal applications), as a consequence of which, laws evolves continuously, in trying to safeguard the society from wrongdoings and harm thereof. The PIL system is one such example of applying legal provisions with a view to minimise harm caused to the society. In India, environmental violations are frequently challenged in court under the scope of such litigation in order to stop or mitigate the damage with special reference to the rights of the people at large. This is more common in areas of environmental protection considering how environment-related laws are still at a nascent stage and emerging in the global perspectives. Similarly, many activists feel that consumer protection laws leave many aspects undefined. Consumer courts are often guided by ethics and morality of issues in conjunction with the laws; and consumer cases are often based on seeking moral justice rather than legal justice. Led by moral considerations of the Land Acquisition Act, 1894, and owing to ethical loopholes therein, the government introduced the Land Acquisition (Amendment) Bill, 2007, along with the National Rehabilitation and Resettlement Policy, 2007, making it mandatory for parties concerned to prepare an independent ‘social impact assessment’ where acquisitions involve or are likely to affect 400 or more families in plain land and 200 or more families in tribal and hilly areas. This is also an example of how ethics and the recognition of ethical duties can influence legal changes or lead to the enactment of laws in a country. Therefore, in order to ensure moral justice along with legal justice, a company or an organisation (including the government) is bound by both law and ethics in its dealings. The aim is to bring fairness and justice in (business) actions, and minimise damage to the society, arising from inappropriate ethics or misconduct associated with such business dealings. Let us consider one such example of both legal and moral bindings upon a company: A company recruits a female engineer through an open advertisement, and appoints her at a salary that is much lesser than other male engineers with similar experience and working with a similar type of job responsibility. The company can, if challenged, legally justify this action on the grounds that: (a) the offer is in accordance with their policy of open-ended scale (with no minimum salary fixed); (b) it is the best they can offer as per their judgement; and (c) the candidate is free to accept or refuse the offer. Apparently, this may be in keeping with the law but, a deeper examination will bring up the issue of (gender) discrimination vis-à-vis the salary and role in the company. Morally, the company would be unjust and unfair in thus discriminating between jobs of similar skill and responsibility depending on the employee’s

Ethics in Business and Corporate Governance

gender. To stop such unethical practices in industries, many developed countries (e.g. USA, UK, etc.) call upon the employer to declare if they are an ‘equal opportunity employer’, and legal action [e.g. US Equal Employment Opportunity Law (EEO)8] can be taken against such companies for discrimination in employment. In fact, more and more countries are adopting ethico-legal systems to stop such exploitation in the job market that harms the weaker section of the society, as well as to support equitable social development. For example, the EEO provision covers: discriminatory employment decisions, discrimination in compensation and benefits, (sexual) harassment, and retaliation. The last area covered under EEO prohibits employers from retaliating against employees because they have opposed any unlawful discrimination or participated in a discrimination related proceeding.

In countries where there is no legal protection against discrimination, the ethics of the managerial people and ethical standards of the company can help in ensuring balance between fairness, justice and equity. Law is the primary regulator of a company’s affairs, but it necessitates the support of ethics in business dealings to ensure fairness, justice and equity. Cited, here, is a more common case in the area of consumer marketing: A store advertises prominently in the local daily, the sale of household goods at a heavy discount. On the day of the sale, after noticing that customers are coming in hoards, the owner of the store tries to withdraw some items from the sale-list and to modify discounts on some fast-moving items. Now, the question is: can he withdraw the items or drastically cut discounts to take advantage of the situation? The law may not prevent him from doing so, but ethically he cannot change the conditions under which his advertisement was printed and as long as his stocks last. Moral standards demand that the store and its manger faithfully and fairly serve the customers as per their promise, and that they do not take undue advantage of the situation. For justice—from both ethical and legal points of view—the store can be referred to a ‘consumer protection court’ on the grounds of non-compliance to its public offer and the unethical act of unilaterally changing the condition for the sale. Note: In today’s times, most ‘sale’ advertisements, to avoid such complications, include a clause that the ‘offer is subject to some conditions’ or ‘conditions apply’. Such advertisements forewarn that business operations are generally opportunistic in nature, aiming to make or avail any scope for profit. In business practice, such situations further emphasise the need for ethics in society—if the consuming public is to be protected from unfair treatment or bargains.

The role of law and ethics is becoming increasingly important in India, for the safe conduct of business in emerging industries, like the IT, pharmaceuticals, insurance, advertising and other service sectors. For instance, companies in the IT and BPO (business process outsourcing) sectors deal with large chunks of confidential data pertaining to their clients. Maintaining secrecy and preventing unauthorised transfer of this data is one of the core requirements of this industry. With more and more organisations—banks, insurance, credit card companies, 8, accessed on 30 July 2009; discrim.htm, accessed on 8 October 2011

Law, Ethics and Business

etc.—storing more and more data about products, customers, financial and sales records on their computers, it is of utmost importance that all this information is handled with complete security and confidentiality.There have been several instances of theft of personal data and fraud in the BPO sector in India, raising many doubts about the reliability and quality of India’s BPO services to the highly digitised western-world customers. Furthermore, the present state of laws and law enforcement pertaining to this sector in India may not be effective enough to deal with this type of crime and misdemeanour. Hence, in such industries, only the consideration of moral and ethical principles (including the conduct of their employees) can prevent fraudulent acts and protect client interest. Analyses of business processes of these service industries—BPO, banking, insurance, etc.—strongly indicate the necessity for the management and employees to abide by certain moral principles and ethical standards. Much like BPO and IT services, there are many other businesses where law and ethics have to join hands to enforce good practices in business dealings, especially in areas of finance (banking and insurance). The emergence of many private insurers has increasingly emphasised the role of ethics felt in India’s insurance sector, where people (insurance policy holders) share both risks and gains by joining forces. An insurance company combines the risks of many people to enable each individual to enjoy the advantage of the ‘Law of Large Number’9. However, in this distributive-risk-and-gain format of insurance deals (policies), transparency and disclosure of risks and gains are prerequisites for fairness—making such deals strongly dependent on the ethical conduct in this business. Another such example, where the role of ethics becomes important is the area of new drug development wherein pharmaceutical majors undertake trials upon ignorant human patients: The law in many countries allows clinical trials of new drugs on human patients; there are regulations to control this, the whole exercise can be fraught with danger and harm if not guided and managed by the principles of ethics and moral responsibility. While these trials are not simply the case of ‘law and order orientation’ as discussed earlier (Chapter 1, Section 1.3), they should follow the ‘universal ethical principles orientation’, i.e., the highest state of ethical maturity and sensitivity to the moral issues of the trials (to be discussed in Chapter 4). Clinical trials must be conducted ethically after securing the free consent of the receivers (of the trial). If the human body faces any risk or side-effect from the new drug, it must be explained and tried only after the patient has completely understood and consented to the same. Thus, the role of ethics along with the law is critical in such business operations in order to minimise the risk and harm to people.10

More often than not, law and ethics have to come together to create and maintain a harmonious society and for the optimisation of national resources that benefit society, people and stakeholders of a business. At times, the law alone may be unable to bring out the best solution—for which it is essential to examine the social and ethical issues involved with the problem on hand. This may be made clear with the following illustration, concerning government action, but nonetheless applies equally to business. 9, accessed on 30 July 2009, accessed on 30 July 2009;, accessed on 7 October 2011 10

Ethics in Business and Corporate Governance

Consider what is widely held as a political move in India—the case of special reservation of seats in places of higher education, for students from the backward classes. However, when this matter was referred to court, the law held that this provision was justified in view of the fact that the backward community is poorly represented in professional services, and that the cause of this poor representation is a low intake of students from such communities by institutions of higher education (vide Supreme Court judgment on Indian Higher Education Bill–2006). The Supreme Court of India cleared 27 per cent reservation for the OBC (other backward class) category in professional degree colleges like the Indian Institute of Technology, Indian Institute of Management, etc. However, in passing the judgment, the Supreme Court also took note of the ‘creamy layer’ present in these categories and excluded them from the provisions of the reservation quota. This may be the proper legal view, being the most visible and proximate cause, but an analysis of the situation may reveal that the remote and connected causes—such as lack of good primary education, motivation to change, lack of financial support, socio-economic conditions, etc.—have a more critical bearing on a fair and just solution to the problem pertaining to students from really backward classes. Going by the legal sanction of reservation for all backward classes, there would be enough doubt left if the problem can be solved by providing reservations and admitting a few more backward students out of turn to professional courses. Many academicians and social workers have argued that this may also lead to dilution of academic content and bring mediocrity into the output—a situation that may gravely endanger the well-being of the nation in the present-day competitive global business environment. If ethics are considered along with the governing laws, ethical reasoning would take the total and broader social view of the situation, facts and the state of the problem in order to do what is fair and morally justified. In other words, ethics would aim to examine: (a) if any such move would cause any harm to others in the society and nation; (b) if the move will produce ‘greater good for a greater number of people’ in the society; (c) if there could be another solution to the problem (one with lesser damage to the interests of others); and (d) if the decision is fair to all stakeholders without infringing the fundamental rights of any individuals. These ‘ifs’ are based on reasoning to discover the ethics of the decision and as a means to arrive at other alternative, potentially less damaging, solutions. Note: Incidentally, because of the moral dissatisfaction owing to the reservation policy, the Government of India is introducing special relaxation clauses and amendments to the Quota Bill, from time to time, to constantly try and accommodate the just and fair demands of the society at large.

The role of ethics (even in the aforesaid case) is to harmonise the outcome to bring about fairness for all concerned.Thus, ethics and ethical considerations help to expand the scope of the problem that may give rise to a better solution—in contrast to the efforts of law alone. Ethical judgment, in such cases, may impose moral responsibility (i.e. ethical duty) on the government to address the problem for fair and right solutions with minimum damage to the interests of the others concerned. Ethical consideration is based on the broader spectrum of an issue, and makes one seek all contributory causes or repercussions for an action. At times, the law may be constrained to consider only the direct cause and consequence of the incident for judgment, but the spirit of ethics will ensure that such judgments do not harm others in the society. Thus, law and ethics (i.e.

Law, Ethics and Business

the ethical principles) often come together in protecting the fundamental and moral rights of citizens and society in a country. There are many instances in India, of conflict between the executive body of the government and the judiciary, in interpreting the provisions of the law, because in the light of jurisprudence used by the judiciary, the moral view of an issue often plays the deciding role. In India especially, the many PIL petitions seeking fresh judgment and mandate on pollution and environment related issues are examples of how rules of ethics and moral responsibility can serve society. Learning from these examinations of (moral) ‘cause and effect’, either from legal or ethical point of view, allows for the development of the legal system in a country, or helps in enacting additional laws (or amendments) to protect rights, duties and moral responsibilities. Often, ethics work in creating a balance between legality and morality. A unique example of ethics gaining increasing priority over the legal provisions, for such a balancing act in business dealings, is the buying-and-selling of goods in today’s competitive marketplace. To settle any dispute in the buying-selling contract, the law provides the traditional dictum of ‘buyers to be aware’, thus calling on buyers to examine, inspect and satisfy themselves before making a purchase. But ethics of business practices, on the other hand, require that the salesperson must truthfully describe the product and disclose its service features to make the buyers aware about what exactly they are buying or getting in return for their money. This approach helps to make the transaction more transparent than what the law can ensure; it favours the customer in seeking a fair deal. As such, in case of dispute, a consumer court takes into account such disclosures and transparency in transactions, when announcing its decision. Ethics consider that buyers buy in ‘good faith’, based on product disclosures, is better than having to inspect and satisfy oneself before the purchase—it protects consumer interest by helping them make well-informed decisions about the purchase. Since this ethical approach to selling goods favours customers and customer satisfaction, it is universally preferred by retail chains and other such businesses where the competition is severe because, customer satisfaction and customer loyalty matter the most in a competitive environment for the success of business. Most consumer protection cases, therefore, base their judgments on ethics rather than on legal conditions to ensure a fairer deal. Thus, law and ethics are equally important to conduct business in a fair manner, and both have a common purpose—to prevent wrongdoing in business and in society. In a country, while the law is an administratively enforceable instrument for justice and fairness of decisions and actions, ethics and ethical responsibility in the society, business and governance depend much on institutional and individual awareness—supported by the quality of legal systems in a country.

3.3 BUSINESS PHILOSOPHY, SYSTEMS AND ETHICS A business philosophy, on the one hand, is created with a view to attain certain goals and objectives, policies and programmes, on the other hand, are drafted in order to implement the actions that are required to accomplish those objectives. Generally, policies are based on the ideology of the organisation and its managers. Ideology, here, refers to a set of beliefs or a train of thoughts shared by the members of a group or institution or company reflecting the social needs and aspirations of individuals, common groups, cultural groups or employees and

Ethics in Business and Corporate Governance

other stakeholders. Ideology often reflects the faith, behaviour, response, and actions of individuals or the company as whole, and influences the policy-making processes and actions. A business ideology, therefore, determines or guides the policies and actions with respect to issues internal as well as external to the organisation, the latter pertaining to customers, suppliers, society and the government. All these are, in turn, reflected in the systems that a company pursues by design and intention. Therefore, the question: who designs and who pursues the systems, and with what purpose? In short, who influences whom, i.e., does a business ideology shapes the manager’s ideology or does a manager’s ideology shape the ideology of the business? In practice, it is observed that there are some (natural) leaders who influence and shape the company’s business philosophy and purpose, and there are others who follow the same. A company is an ‘immortal fictitious person’ with responsibilities and liabilities for its policies and actions, but these policies and actions are drafted by individuals who are functionally related and responsible. Therefore, ideologies of the people at the top (i.e., managerial team) greatly influence business decisions and, hence, the company’s business ideology. Among other things that it stands for, a business ideology reflects the company’s perspectives about its ethical responsibility and conduct. Not surprisingly, ideologies of the proprietor or the chief executive of an organisation generally determine the company’s attitude towards its employee relations (i.e. industrial relations) and social responsibility. If the ideology of these people at the top is not ethical, it is likely that their actions may ultimately lead to some unethical or incorrect behaviour and actions in the company—with disastrous repercussions in industrial relations and for the well-being of the business. There are many instances of such disasters all over the world, but the collapse of Enron (USA, 2001) and Satyam (India, 2008-09) stand out as classic examples of bad ideology and immorality of a few individuals at the top. Naturally then, the subject of business ethics places utmost importance on individual ethics, because it is (some) individuals and their ideologies that are at the centre of a business system and its functioning. The logical judgement about ethics in business therefore takes into account personal virtues and ethical standards of individuals as well of business systems, processes and of the organisation as a whole. However, the concern of business ethics, as a subject, is not to focus on ethical violations, but to help in dealing with practical business problems that are related to specific duties and responsibilities arising out of the total business relationship. Total business relationship is a concept that would embrace both legal and ethical obligations along with contractual rights and duties. Like total quality management (TQM), it is an integrated approach to business management involving the maintenance of ethical standards in all policies, decisions, actions and relationships—with the overall aim of helping the business achieve a superior performance. Therefore, business systems, structures and goals must be designed to fulfil this total quality of business relationship. Ethics in business operations can be examined from different perspectives, including: enterprise perspective, employee perspective, perspective of its customers and the market it serves, and the social perspective. More often than not, there will be ethical conflicts in serving these different constituents of business. For example, the enterprise perspective of a business would aim at maximum returns for the owners; employees would expect a fair share of the returns by way of increased wages and benefits; customers would seek a quality product or service at lower cost; and the social expectations would cover increased employment, better environment and higher spending on

Law, Ethics and Business

social welfare. These conflicts in a business arise not only due to conflicting interests of its various constituents, but also in terms of understanding the purpose of that business. If one argues that the principal purpose of business is to make profit for its owners or shareholders, then those activities and actions that—prima facie—decrease the profit by sharing it with others would be inadmissible logic for running the business. But, if one cares to take a long-term view of business interests, it would be apparent that even to make profits the business should adhere to the principle of moral duties, because failure to hold on to moral duties and responsibilities could lead to serious consequences, i.e., employee dissatisfaction or customer apathy. In other words, continuously ignoring the interest of workers may lead to work stoppage; violation of environmental norms may lead to cancellation of business licence or a heavy penalty; lack of interest in development of neighbouring areas may lead to agitation by local people and loss of image; and lack of adhering to promised standards of product features and quality may result in customer dissatisfaction and apathy. Hence, today’s management experts believe that even for the sake of making profits alone, it is more advantageous to adhere to moral rules and ethics than to overlook them for some quick gains—because any failure to abide by ethical standards could prove to be very costly in the long run. As has been mentioned earlier, ethics help to harmonise and reconcile the conflicting interests of various stakeholders of a business, and help in arriving at a satisfactory solution to the problems. Figure 3.2 shows components of operational perspectives in ethical business practices, which are also known to be the sources of ethical conflicts of interests in business. Modern business philosophy argues that moral duties and responsibilities of business organisations extend well beyond their owners or stockholders; more than just adherence to the laws of the land, these duties extend towards all stakeholders who have any interest

Enterprise perspective

Employee perspective

Social perspective Business

Market perspective

Customers perspective

Figure 3.2 Components of Operational Perspectives in Ethical Business Practices

Ethics in Business and Corporate Governance

in the conduct of the business—be it the employees, stockholders, customers, suppliers, local community, government and the society in general. According to the modern business management approach, stakeholders have the right to know how the business operates and to participate in the governance process.This approach of moral duties and responsibilities towards all stakeholders is ingrained in the modern concept of TQM—of which business ethics have emerged as a part, demanding fair dealings in all business policies and activities for the total satisfaction of all (employees, consumers, vendors, stockholders, society, etc.). Therefore, the need to hold on to ethical standards becomes even more demanding in the context of global business where, in addition to legal issues, ethical issues are also to be appropriately addressed in view of different cultures, ethical standards and market behaviour. A case in point would be the McDonald experience in India: The media reported that McDonalds—the US fast food chain in India—was using some animal fat product to create the special flavour in their food products. People of certain religious faith found this highly objectionable and, if McDonalds was to successfully carry on its business in a country dominated by that religion, then they would have to refrain from any such practice. Furthermore, McDonalds displayed prominent notices at all its outlets informing (potential) customers regarding the said animal fat content in their food products; in fact, the company responded to the protests by placing advertisements in domestic newspapers extolling its commitment to vegetarian food11. Had it not been for this timely action, the breach of ethics thus committed would have had serious social and market repercussions, affecting business at McDonalds.

In the pursuit of economic benefits, business operations cannot be separated from the influences of social, political and cultural impacts—including that of religion. And these influences cannot be managed by economic and legal actions alone; they have to be dealt with ethical considerations as well. The essentiality of ethics in business and the impact of its failure on the success of a company has become so great in the modern, consumer-driven business, that today’s business process is described as the process of strategically and ethically managing and influencing the market and nonmarket environments in order to accomplish the stated vision and mission of the company. Important areas of business systems where ethics and ethical considerations play a critical role in formulating the policies and action plans, are: corporate social responsibility (CSR), human resource management (HRM), financing and accounting systems, environment management, product development and sales and marketing policies. However, this does not exclude the need for adhering to ethical standards in day-to-day dealings. The foundation for ethical behaviour in business goes well beyond corporate culture and the policies of any given company; it greatly depends on timely moral training of employees, on other institutions and on the environment that affect an individual, the competitive business environment of the company’s business and, indeed, society as a whole. 11, accessed on 7 November 2009 and on 8 October 2011

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In fact, ethics have become a valued business strategy, especially in competitive business environments where the brand image of a company is largely influenced by its ethical business practices. A notable example is the Tata Sons in India, established in 1868—a 142-year old company, that stand tall today on its brand image. In the words of R. Gopalkrishnan12, Director of Tata Sons, for entrepreneurs who don’t think they have time to worry about ethics in the early years, that’s negligent if you intend for your company to be around a long time. It’s like saying, ‘I don’t have time to shape my child’s character right now. I’ll do it when he’s 20. The child’s behaviour is shaped by the first 10 years; so it is with a company, if the company has to sustain for a long time. At Tata, the code of ethics is published in 15 different languages. Every employee signs it every two years. More important, the company runs almost 300 workshops a year where employees discuss the issues they face. “No great truths” come out of this process, Gopalkrishnan said. “There’s no new enlightenment except in our own hearts” as employees talk about how to apply these principles to real-world situations. This is a process of moral training of people who associate and assist the companies to reach to its brand image. Therefore, in business, one thing that works all the time is ethics. The brand benefit for Tata Sons comes because of its reputation for value-based approach to doing business. In essence, ethics has been an important business strategy for Tata Sons since its inception. Throughout its 142-year history, Tata Sons has come to be known as a company that can be trusted.

3.4 SCOPE AND ROLE OF BUSINESS ETHICS Business ethics, as a subject, aims to create a deeper understanding of what is good and bad, what is moral and immoral or what actions are right or wrong in the operations of a business with respect to its customers, employees, investors, society and all other stakeholders—in order to protect them from harm and damages to their interests. The subject not only covers traditional businesses, but also institutions, service providers, society and an assortment of activities relating to consumers and users of goods and services. Role and scope of business ethics has been discussed in Chapter 1, but the subject matter is being repeated here due to its relevance in the context of law-ethics and business. Business ethics is concerned with the morality of actions in business operations, and deals with: (1) rightful expectations of consumers, society, employees and other stakeholders; (2) fairness in competition and advertising of goods and services; (3) social responsibility and care; and (4) overall corporate behaviour in governance—with the ultimate aim of protecting people, society and all direct and indirect stakeholders from damages. Some common examples of immoral business practices in an economy are: bribery to manipulate business interests; manipulation of market conditions for unfair practice or pricing; non-transparent business transactions; deficient customer services; violation of environmental laws, etc. On the other hand, bribery, corruption in public places, exploitations of labour market, unfair wage structures, unequal opportunity based on colour, creed or sex, hazardous working conditions, unmindful destruction of ecology and environment, etc. are a few of many unethical practices prevalent in business practices and 12, accessed on 8 October 2011

Ethics in Business and Corporate Governance

industries. And, all these activities are primarily carried out by individuals—at times, acting out of their own choice and, at other times, on behalf of the organisations they are connected to. In either case, these non-moral actions in the course of business operations always hurt the interests of others in the business cycle or the society at large. The purpose of ethics in business is to protect these people and stakeholders from such unsuspecting damages to their interests arising from the choices and actions of either the organisation or its employees. In the context of an organisation’s moral behaviour, it should be noted that organisations are composed of human individuals who act under certain relationships and circumstances in order to perform certain assigned or projected activities and responsibilities for the propagation of business. Thus, the acts and choices of an organisation originate from individuals who work for it, in the choices and actions of those individuals. Therefore, it is these individuals who must be seen as the primary bearers of moral duties and responsibilities to uphold business ethics. It has been observed in all corrupt and failed business cases, discussed thus far in the book, that it is only a few individuals at the top who have been responsible for ethical violations and destruction of value in the business. Thus, ethics in business largely depend on the individual characters and their honesty and integrity. But, there are also those instances when businesses have been in trouble due to risky business models, unrealistic business targets, loose administration, and slack regulatory controls—all of which are policy dependent. Therefore, judging ethics in business would require an examination of: (a) How ethics and ethical standards of working for individuals are introduced, maintained and managed in an organisation; and (b) How ethical principles and ethical governance are factored into a company’s policies and programmes. Also, for effective control over the ethical standards of business practices and governance in a country, there have to be effective regulatory control over the conduct of business and profession. To study business ethics and its practice, therefore, these features of business operations are to be examined, along with ethical standards that have (or have not) been maintained and displayed in different actions and behaviour of the company. This is the direct method to examine the ethicality of actions or organisational behaviour. But, business operations, which encompasses taking policy decisions, setting goals, and deciding and pursuing a course in practice that will ensure the best results, involve a large number functions, namely: organising, structuring, manning, systematising, administering, controlling and managing. Moreover, business situations are not static—the course and conduct of a business may change with the changes in circumstances, business environment and goals with time, place and context. Some school of thought, therefore, suggests that since business ethics encompass a wide variety of topics and situations, it is better to examine the subject of ethics with the following classification: (1) systemic, i.e., issues related to systems of carrying out the business; (2) corporate, i.e., issues of ethical questions raised about the way a particular company decides its policy and operates; and (3) individual issues, i.e., ethical behaviour and ethical questions about individuals within a company. It is argued that, often, business operations bring about situations wherein decision-making involves a large number of extremely complicated and interrelated issues that can cause confusion unless they are carefully sorted out at first, and distinguished from each other. Such a situation has been illustrated in Chapter 1, depicting an easily identifiable work-situation, and being repeated here:

Law, Ethics and Business

A company official, operating in the eastern region of India, was asked at a very short notice to go to Delhi to immediately renew an operating licence that was mandatory for safety as per factory laws. The company had overlooked the renewal date and, hence, failed to do the needful in advance—leading to this emergency. Considering one of the company’s mills would have to be shut down without that operating licence, the officer was given the task of getting it renewed with utmost urgency. Immediately, the officer travelled to Delhi on company duty and met the respective authority —who, he was made to realise, required some gratification, if the renewal was to be done on priority basis. But, as a rule, his company did not allow for any gratis or bribes in order to expedite any business related actions. The officer was therefore put in a situation where, without gratification, no licence renewal could be transacted in a hurry. He conveyed this to the bosses at the factory, but they too were helpless in meeting this demand due to company policy. Finding no other way to expedite the renewal process, the officer adopted an indirect method of pleasing the authority concerned. He invited the department-in-charge to a lavish dinner—where he not only explained the urgency, but drew upon his sympathy for some urgent action. He kept his boss informed about the same. While the dinner was a success, it had cost the officer much more than the daily expenses he was entitled to as per company policy. However, the officer spent the money at his own risk only to satisfy the urgent need of his company. On his return from Delhi, having successfully renewed the company’s licence, the officer submitted the actual bills. The finance department refused to pay. The officer then withdrew the initial bill and, as per his boss’ suggestion, submitted another bill—this time, citing the same expenses but under different grounds, e.g., inflating his transport expenditure and a few other entitlements. However, the company’s finance department held him guilty for overstating the travel bills and issued him a show-cause notice for disciplinary action.

Now, the officer’s colleagues asked if the company was morally and ethically right in punishing an employee who had only made sincere efforts to serve the interests of the company —notwithstanding that he had legally violated the company’s travel rules. In this case, there are elements of three types of issues: systemic, corporate and individual. These elements are: (i) the officer did not manipulate the travel bill for personal gain; (ii) the company assigned a task to the employee without providing the resources it called for; (iii) the officer acted as per the demands of the situation in order to save his company from a loss (closure of a mill) that could have cost jobs to many; (iv) the system did not allow for any relaxation in travel rules for uniformity of application; and (v) the finance department scrutinised the officer’s travel bills focussing more on ‘what rules state’ rather than on ‘exigencies for the organisation’s need or utility’. Here, judging who is moral and ethical is a somewhat complex matter; instead, distinguishing issues as per systemic, corporate or personal ethics can be helpful. In this particular case, the officer cannot be held responsible for violation of individual ethics in discharging his duty. He manipulated the provisions of the company’s travel policy and resubmitted his bill, but this was not done with profit motive—it was only to get compensated for what he had actually spent. The system (i.e., the company’s travel policy) should be transparent and uniform for all, and it should be respected. Hence, the company is right to have rejected his travel bills and, at the same

Ethics in Business and Corporate Governance

time, is also ethically right in not resorting to bribes, etc. Then, how can one operate ethically within this system? It is the task of the management to provide resources for any job or official deputation to the extent it is fair and just; and to that effect there should be provision and management controls in business practices. In this case, it will be unfair and unjust if the officer is punished for his action. Fairness and justice call for an examination of the motive behind an act, and not only of the process in the act. In fact, many companies are found to be lacking in systems that promote a good, transparent and ethical work culture. Morality and ethics related to these distinguishable issues have earlier been discussed as general rules, but how do we consolidate those moral and ethical rules with business-specific situations? This is the crux of ethical business practices. Practitioners of business have to balance a decision or action by considering ethical issues from various perspectives (as brought out in the officer’s case); ethics are not an administrative tool but a template that helps to protect and propagate fair practices and to ensure justice, fairness and care to all involved in the business process. There is another, somewhat similar approach to looking at ethics and ethical practices in business, but with more clarity. Practitioners of business ethics suggest that the best way to consolidate and understand ethical issues and ethical practices in business would be to examine ethics in relation to the ethics of business philosophy (i.e. principles and practice) and the ethics of professional management in different areas of business operations. Ethical issues in these areas of operations are by and large systemic and corporate, but do not altogether exclude individual ethics in analysing cases. Why this approach stands out is because of its in-built character of assigning responsibility to the company for structuring corporate processes and policies—with an eye to what could be adjudged logical, ethical and fair to all stakeholders.The cases described in the beginning of this chapter showed lapses in ethical structuring and policy formulation leading to greed and risky financial measures and transactions. It is widely held that, in today’s business, ethics are reflected in corporate governance (responsible for the organisation structure, policy formulation, execution, monitoring and control); in CSR (which ensures integration of social well-being into corporate goals); and in its systemic management (of people, processes and outcome). The latter is also a part of corporate governance when considered in its totality. Broadly, ethics in business practices involve: (a) ethics as applicable to business philosophy: namely, corporate governance involving structuring, policy formulation, management, employee relations, social justice, ethics in marketplace, environment management, etc.; and (b) ethics of professional management: namely, ethics of human resource management, financial management, engineering and new product development, sales and marketing, R&D, etc. Adhering to ethical business philosophy and professional management is the responsibility of the company and its management. In addition, there is also a need for professional ethics of individual professionals engaged in different fields of business operations, e.g. engineering, accounts, human resource management, sales and marketing, advertising, etc. (some of which are discussed in the next chapter). Yet, at this stage, it must be emphasised that professional ethics are assuming an overwhelming importance in business practices of today’s competitive and service-oriented business environments. Business ethics guide the applications of ethical rules and principles (discussed thus far) within the context of commercial and business transactions—such as, relationships between

Law, Ethics and Business

an employer and employee(s), and between a business and its customers, and a company’s obligations to the society. Business ethics examine the various moral and ethical problems that can arise in business operations, and help to understand and make specific judgements about what ought—and ought not—to be done. Their main purpose is to guide business organisations, in the light of ethical principles, in dealing with various practical problems in their operations, and in conforming to specific duties and responsibilities that might arise due to the necessity of being ethical or conforming to ethical practices as recognised by the society, government and regulators. For example, attending to the distress of a loyal employee is considered ethical, whereas violation of pollution norms, notwithstanding any compelling circumstances, does not conform to the expected ethical practices. Hence, a company’s business practice must cover a wide range of ethical issues, from employee welfare to environment protection and development. However, any ethical binding or responsibility must not be seen as a restraining factor in business operations. This is because the ultimate aim of business ethics is not to withhold business operations (in economic terms), but to strengthen the decision-making process and, in turn, minimise the damage from bad employee morale, poor market reputation, lack of customer support, legal and social penalty, and other such consequences that may deter the company’s economic progress. It is in the long-term interest of a company to be ethical in its operations, management and dealings with the customers and society. The corporate world abounds in examples wherein businesses had to be shut down owing to their unethical practices (e.g., Enron, WorldCom and Satyam). Many moralists tend to look at business with the suspicion that these institutions aim at making money—even if by trampling humanity and violating ethics.The business world abounds with examples where greed for greater profit has led to destruction of the environment (e.g. destroying forests for wood), immoral business practices (e.g. selling adulterated foods), and loss to stakeholders (e.g. company manipulating its accounts), among other harmful consequences. But, those actions had mostly resulted in very short-term benefits to them, if any, and always reminded the business professionals about the necessity to be moral in outlook and ethical in dealings for long-term benefits of the business. All moral philosophers advocate maintaining ethical standards—which is an age-old need —in society and business practices. Yet, some also believe that business and ethics are at odds and in contradiction with each other, arguing that, in business, determining and doing what is practical (from the viewpoint of profits) and what is moral involves two different lines of thought that cannot be reconciled. But, with the growth of industries and global business, companies have redefined the aim and purpose of business—especially with regard to customer satisfaction and customer support. In a competitive business scenario wherein customers (i.e., all stakeholders—consumers, investors, employees, suppliers, etc.) have the choice to decide what they should buy and from whom or where they should invest, work or supply, the ethical image of a company or business has gained importance. Planning business systems and strategies in sync with ethical principles has become an essential requirement for the long-term survival and benefit of business. There are plenty of examples to show that customers go where ethics are. Thus, the business world is now faced with the challenge of tailoring their business models and practices in a way that agrees with the principles of ethics. In an open and competitive

Ethics in Business and Corporate Governance

market, ethics are not at odds with the purpose of business. With the increasing globalisation of business operations, development of rapid communication avenues, surveillance of electronic and print media, and stakeholders’ general awareness about the rights and duties of business, ethics in business operations and management have become the benchmark of good governance and the hallmark of brand image and success in recent times. Industry or business can no more deny moral rights to its employees and customers, and cannot defy the moral responsibilities of protecting the health and environment of the society in which it operates. A business has the ethical responsibility to its employees, society, government and other stakeholders who are related to the well-being of the business, because a business exists for the customers and society—and not vice versa. Many NGOs in India are now successfully focusing on preventing ethical violations of duties and responsibilities, especially in social services and social welfare measures of the business world. In fact, ethical considerations often lead to optimisation of benefits of a decision, which would have otherwise been considered as conflict of interests. In this context, illustration from Chapter 1 is being repeated here to re-emphasise the point: The demands for ‘festival bonus’ are not uncommon in India, nor are the instances of work stoppage or strikes for the same. So, is bonus a ‘right’? In Indian companies, the system of rewarding or gifting a bonus is based on the ethical principle of ‘care’ with a view to help employees better celebrate a festival with some financial support. Generally, such care displayed by the management in times of need, keeps the employees committed and motivated to the cause of the company. The bonus system involves a company sharing the cash surplus with its employees. However, some shareholders (who do not receive this festival bonus) consider this system as wasteful and a burden on the cash-flow management, thereby limiting the utilisation of company resources in profit-making activities—which remain the primary purpose of their investments. From the perspective of shareholder interests versus employee benefits, the system of ‘festival bonus’ may seem to be conflict of interests, but, a more realistic analysis will show that this action is likely to lead to greater productivity and profitability —through improved morale and motivation of employees. Thus, the act of giving festival bonus may actually benefit both parties—employees and stakeholders—in business.

In this way, the ethics of care towards employees, in times of their need, can be viewed as a good business strategy rather than as a conflict of interest. The latter view could, in fact, lead to very short-term gains but greater losses in the long-run.Thus, reconciliation and harmonisation of conflicting interests emerge as important roles and scope of ethics in business. In view of the role and scope of business ethics discussed here, ethical issues in business practices would involve the study of how the company: encourages individuals to maintain ethical standards in business (‘Individual and Ethics’, Chapter 4); takes care of its consumers and market environment (‘Marketing and Consumer Protection’, Chapter 6); encourages standards of professional ethics (‘Professional Ethics’, Chapter 6); takes care of environment and ecology related ethics (‘Ethics and Environment’, Chapter 7); and ensures quality of corporate governance including CSR (Chapters 9 and 12).

Law, Ethics and Business

3.5 BUSINESS SYSTEM AND ITS ENVIRONMENT VIS-À-VIS ETHICS If ethics are so necessary for business, then where and how does one apply them? Business is not operated from within a box, it concerns a variety of environments where each such environmental condition can influence its outcome. Broadly, business operates in two kinds of environment: the internal environment and the external environment (Figure 3.3). A company cannot work in isolation of these environments, which often interact with each other through the choices of actions of the people in the business. These factors are not independent; they are interdependent for results. In the modern social and economic environment, the success and well-being of business depend on how well the enterprise deals with factors and situations arising from environmental influences. Hence, ethics in a business enterprise have to deal with the totality of the environment in which it operates. External environment Internal environment People/group


Environments Organisation /policies

Departments /functions

Processes/activities Internal environment External environment

Figure 3.3 The Internal and External Environments of a Business

Operation-wise, the internal environment comprises the company’s organisational structure, policies and programmes, functions, people, processes and activities. A company has the responsibility of designing and cultivating these internal systems and procedures that abide by the governing laws and ethical principles in its functioning. Such internal systems are the outcome of the choices of the company’s management, and are totally controllable by the company and its management. Few examples of internal environments are: the ‘investment and monetary policy’; ‘reward and promotion policy for employees’, ‘purchasing policy’, ‘wage policy’, ‘safety and environment regulations’, etc where policies and procedures are involved and they encompass the interest of the investors, financiers, suppliers, employees and environment (pollutionrelated). It is generally accepted that such internal policies, procedures and programmes are fully controllable by the organisation itself. Compared to controlling the internal environment, it is relatively difficult to deal with the external environment, which is not exactly within the company’s control but influences its operations. Examples of external environment are: ‘market forces’, ‘trade regulations’, ‘environment regulation’, ‘licences’, ‘trade unions’, ‘competition’, ‘advertising and promotion’, and ‘government, political and social environments’, among others.

Ethics in Business and Corporate Governance

The approach to lawfully and ethically handle the external environment needs more cautious and careful judgement, because the related issues can: (a) often encumber more than one factor; (b) involve social and political interference; and (c) often result in serious repercussions on the company’s business potential in the case of their failure. Therefore, for the success of business, ethical principles and standards must be upheld in both internal and external environments of its operations. The following sections of this chapter include a more detailed discussion on business environments vis-à-vis ethics, the approach being to highlight the importance and effect of ethics in different business environments and how they work.


Ethics in Business—Internal Environment

Every business has its own organisation structure, rules and regulations governing the conduct, and policies and procedures for activities that are directed to achieve the company’s goals and objectives. There are executives and employees who carry out these activities on behalf of the organisation, and take decisions or cause to take decisions and actions. This chain of command follows a hierarchical structure of authority in which orders and directives are passed down for execution. Figure 3.4 shows (only partly) a representative structure of authority in a manufacturing organisation. Generally, orders from the superiors are considered binding on the subordinates as per the company rules—but only insofar as the order stands the test of morality and reasonableness. If an order is not moral and is likely to unduly harm the interests of others, an employee is not ethically and legally bound to obey the same. This stand on ethics has been illustrated through the example cited earlier in this chapter, of the officer doctoring his bills as per instructions from his ‘boss’.Yet, despite such clarity pertaining to morality of an action and the consequent harm, there are many instances of wrongdoing in business—either due to pressure from the Managing Director

Dy. MD (Marketing & Devices)

Dy. MD (Operations)

Vice President-1

Vice President-2

Divisional Manager (Design & Development)



Divisional Manager (Production)





Divisional Manager (Supplises & Logistics)




Figure 3.4 A representative hierarchical Structure showing the Reporting Relationship by ( ) and Chain of Commands by ( )

Law, Ethics and Business

superior or owning to the employee’s choice. The question is, if any wrong or harm is done under such circumstances, then who is responsible for that act? And, if that act had been carried out with the knowledge and consent of the superior as well as the subordinate, then who is morally responsible? Here, given that a business organisation is an ‘immortal fictitious person’ in the eyes of law, responsibility for any illegal act must rest with some (real) individuals—e.g. employee, agent, etc.—who have acted on behalf of the organisation. The law takes cognisance of the individual(s) in the company as responsible for illegal, fraudulent or harmful acts. For example, in the Union Carbide case, the head of the works and staff—behind the negligence causing the gas leak—were held responsible and taken to court. Similarly, in the Satyam case, the chairmen and directors along with two senior auditors of its audit firm (PWC) have been taken into legal custody for alleged fraud and financial crime. In India, when it comes to business ethics, there are regulators and government authorities (e.g. Ministry of Company Affairs and Company Law Board) who intervene in the case of any unethical practice or harmful consequences thereof, so as to check or correct the situation and prevent further damage to the interests of stakeholders. Referring, again, to Satyam, as soon as the financial scam came was reported, the government intervened and dissolved the existing board of directors and barred them (including Satyam’s independent directors) from serving elsewhere till their names were cleared from the scam. Other associated bodies like SEBI (The Securities and Exchange Board of India) and ICAI (Institute of Chartered Accountants of India) also moved in to identify personnel and professionals involved in the scam so as to take the necessary action against them. As discussed earlier, the violation of ethics may not have strong legal teeth—unless the violation is tantamount to crime under the provisions of criminal laws of a country—but its effect can be damaging for both, the company and the individuals indulging in such ethical misconduct.Violation of ethics can lead to loss of goodwill, customer confidence and business, as well as to social protests, suspension (employees or business), debarment from stock markets and stock trading (by the regulators), and withdrawal of financial support from the financial institutions. Since these factors make for the lifeline of a business, any such loss can deeply impact the sustainability of a business. Therefore, present-day business practices demand equal attention to legal as well to moral issues of business. Promotion of good work culture, transparency in business transactions, ethical corporate behaviour, and awareness of corporate social responsibility are the focus of good corporate governance these days. The precise role of ethics in business practices is to prevent and discourage employees from any wrongdoing by way of immoral or corrupt acts—either in an individual capacity or while conducting the company’s business. In short, the absence and prevention of such unethical practices is the hallmark of good corporate governance in the company. A salient feature of business is that it is not run or managed by one individual, but is managed by the involvement of many who are linked with each other’s actions and outcome. This interlinking is variously described or displayed as the functions of departments, teams, groups and suchlike. Businesses are generally characterised by such joint actions or efforts, which are directed to accomplish certain objectives. So, who should be held morally responsible for any unreasonable or immoral act in the business? While law-enforcing agencies would name the officials or employees responsible for that wrongdoing or harm to the employees and society, ethics and

Ethics in Business and Corporate Governance

ethical practices have no such facility owing to their self-regulating nature. Considering the importance of ethics and their effect on the well-being of business, the organisation must put in place a mechanism to promote and control internal environments for a good and ethical work culture. In compliance to this spirit, companies are required to set up internal mechanisms, such as: ethics committee, ethics counsellor, promotion of code of ethical conduct, monitoring systems for ethics, and company rules and regulations to deal with the violation of moral conduct and ethics in the company. By and large, these measures are considered very necessary for controlling and preventing unethical activities in the organisation. No one can deny the necessity of a moral and good internal work environment for good business. However, most business practices face various moral issues in their daily functioning such as, favouritism, nepotism, bribery, dishonesty, indiscipline, misinformation, rumours, insubordination, sexual harassment, undue punishment, etc. Most of these problems are born of human nature and behaviour, and are frequently marked by self-interest, bias and greed. Therefore, coordination of human conducts in business for ethical behaviour is very critical— especially to promote a good internal environment. It must be recognised that business activities are conducted by humans, and by the very nature of business models and processes, all human activities are interdependent. A business can only exist or flourish if people involved in it join in each other’s efforts and adhere to some minimal standards of ethical in consonant with the demands of their surroundings (which includes society, public, governing machineries, laws and conventions of the land). Most humans are also psychologically inclined to reap benefits from an opportunity, leading to the situation where a group of people or few interlinked people may connive to cause harm or commit a wrongful act in a business environment for personal benefits. This type of act is against the very purpose of a business and its overall well-being, and hurts the interests of all its stakeholders and the society. In such cases, moral responsibility for the harm will rest with the people involved, if they have willingly participated in the wrongdoing of their own accord. As per ethical principles, if someone is knowingly and freely trying to effect a fraud or harm, then he or she is morally responsible for the wrong or injury —regardless of whether the deed and or act was done (shared) with others. Thus, in business, anyone who knowingly and freely participates in a wrongdoing is morally responsible for the act, no matter if that has been committed with the help of others, and the individual(s) will be punishable as per the rules of the company and norms of professional bodies concerned. In this context, let us refer to a deal between a purchase manager and a supplier, as an example: The purchase manager struck a deal at an unreasonable rate (overpriced) with a supplier. His ‘boss’ knew about this deal and had verbally approved it, in exchange for some personal benefits for both. When, later, the internal audit department learnt of this deal, the resultant loss to the company (due to the deal) was investigated. The loss ran into several lacs of rupees. The purchase manager pleaded that, since he had sanctioned the order with his boss’s knowledge and verbal approval, he was not morally responsible. In turn, the boss maintained that he was ignorant about the reasonable rate for that order, and had, therefore, trusted his purchase manager’s decision as per company norms. The supplier, when questioned, said that he was forced to provide certain favours and that the order (at his own price) was his compensation for the same. Now, the question is: who is morally responsible, and to what

Law, Ethics and Business

extent? The principles of ethics and moral reasoning say that both the purchase manager and his ‘boss’ are equally responsible, although the supplier’s responsibility is somewhat mitigated as he was forced to act, and did not have power to control the action. However, the supplier is not fully excused from moral responsibility as he could have drawn the attention of another authority in the organisation without falling prey to the profit-motive. Now, compare this situation with the considerations of ‘bribe giver and ‘bribe taker’ in the eyes of the law. The boss cannot plead ignorance because he is supposed to prevent any such wrongdoing, as per company-delegated authority and responsibility, and should have made the effort to know the implications of paying higher price (to the supplier). The purchase manager cannot pass the blame onto his boss because it was he who initiated the wrongdoing and acted knowingly and freely to cause the harm and loss, be it in collusion with his boss. Thus, both the purchase manager and his boss are equally and fully responsible for the harmful act and punishable (suspension, discharge or any other penalty) as per the company rules.

The aim of ethics management is not only to clean the internal environment but also build an environment that supports and promotes ethical conduct in all spheres of business. The next logical steps for ethics management in a company would be to: (a) promote ethical practices; and (b) enforce mechanisms to prevent unethical practice. If unethical practices are allowed uncontrolled, despite the company knowing about them, then it is not in sync with good corporate governance. Furthermore, corporate governance should focus on instituting the required rules, regulations and control mechanisms in the company to ensure fair, moral and just business operations. Generally, companies attempt to prevent corrupt and unethical practices through internal rules, regulations and punishments, which are a part of their corporate governance mechanisms. Yet, it may not always be possible to prevent some immoral acts in business. Hence, what is being increasingly realised is the importance of promoting a culture of ethics and positive attitude in the company’s internal work environment so as to maintain ethics in business processes and practices. Therefore, many companies are appointing ethics— specific committees or designating ethics consultants—to promote ethics on the one hand, and to monitor and control unethical and on the other. These measures not only apply to the conduct and behaviour of individuals (employees), but also to the process of operations, product development, market offerings, and any other business acts that may be likely to affect employee and customer morale. The spirit of business is to serve its stakeholders (any party that has interest in the business) with fairness, equity and (moral) responsibility. Therefore, business processes and practices must be morally acceptable and beneficial to all stakeholders. Failure to check corrupt and unethical act within a business works like a virus, destroying the business no matter how strong the company may be financially or technically. Businesses should not be run for ‘profit at all cost’, because such mottos always pave the way for unethical business motives and practices, which are not good in the ultimate analyses of the business. Of the many related examples in Indian business, the most recent one is the Satyam scam—wherein the company had been indulging in unethical practices for quite a long time. Apparently, it had procured IT-service contracts from the World Bank (WB) for several years, using unfair means and corrupt practices. As a result, this

Ethics in Business and Corporate Governance

august global financial body had barred SCSL from seeking WB business since 200413, which had somehow escaped public attention in India. Such a disclosure, at a time when Satyam was making headlines for all wrong reasons, caused further panic among the investing public and led to rapid erosion of confidence in the company’s business. If the people who run a business are driven only by self-interest and profit motive (as it seems in the case of Satyam), then it will certainly collapse in the long run. Take, for instance, the near collapse of many financial giants (Lehman Brothers, Citibank Inc., etc.) in the US in 200814 due to sub-prime deals. Highly profit-driven companies are often known to cut corners, when it comes to business ethics, endangering the risk and stability of the business. In India too, examples wherein ethics have been compromised are many, especially in areas of emerging businesses e.g. stock market, contract manufacturing and IT-related services. These, being new and fast emerging areas of business, do not have adequately developed laws and governance mechanisms to control or prevent frauds and unethical acts. And, especially when it comes to dealings with stock market, BPO and call centre customers, the necessity to promote internal business environments and adhere to ethical principles and moral responsibility is being increasingly felt. In fact, the quality of business practices in these sectors depends more on the ethics and moral standards being followed therein. The greater the dependence of business on customer confidence, the more critical is its need for ethics and ethical governance. In this context, business ethics not only cover the people within the company, but also span the processes of carrying out its business and management attitude. An example in this regard would be the recent warning issued by the World Bank to some IT-companies in India, regarding the questionable process of their acquiring or seeking new business. All the discussions thus far drive home the point that business cannot survive in the long run without ethics; and ethical practice must include the ethics of employees, processes and products. No doubt business enterprises are critically dependent on the quality of human behaviour, but they have to be equally careful about the products they offer and the processes they follow, all of which are totally under the control of the company. A product that is unsafe for consumption or use must not be designed or marketed for profits.Take, for instance, the US ban on toys made in China in 2006-0715, and the ban imposed by India on all imports of toys from China for six months in 2009. The ban was implemented on the grounds of ‘public health and safety’, as the toys contained toxic materials. It is certainly the ethical responsibility of the manufacturers to ensure that the product(s)—be it a toy or any item of domestic use—does not harm its users. Similarly, there could be industrial processes that could be endangering the safety and health of workers. Business ethics demand adequate protection of employees working in such hazardous areas, if the process cannot be made better and safe. Aiming at protecting the customers, employees, society and all the others involved with the business is not only in keeping with the moral responsibility, but also serves the interests of the business in the long 13,2933,470964,00.html, accessed on 8 October 2011; of_2007, accessed on 8 October 2011 14, accessed on 2 August 2009 and 15 November 2011 15, accessed on 4 August 2009

Law, Ethics and Business

run. Therefore, promotion of internal environment of ethics is not only about employees and employee conduct, it is also about ethics in planning, processes, products and marketing. The failure of a business to comprehensively address the ethical issues in its internal environment may turn out to be a serious threat to the success of the business. At times, it is questioned if the ethical considerations in running a business are consistent with its purpose—which is invariably the profit. Although no study has been conducted pertaining to this aspect of business strategy, there is ample evidence that companies pursuing unethical business practices for profits often face many difficulties in their operations and with the customers. In fact, many have even shut down business owing to failure in upholding ethics in their business operations. The closure of many co-operative banks in India, and the US-64 controversy16 at the Unit Trust of India (UTI) in 2000 are the examples of this hypothesis. UTI—the largest and most trusted name in the mutual fund business in India—had landed into trouble due to the non-transparent and unethical business dealings by a few individuals of the company who were driven by the opportunity of high margins. While profit and return on investment are important parameters in business, these must be earned or achieved by ethical means for the sustainability and long-term well-being of the business. Lack of ethical practice in business has invariably led to one thing—loss of customer confidence, which resulted in the decline or closure of business. In this competitive age, customers are the most critical component of a business, and if they lose confidence, it becomes impossible for the business to survive. One of the primary roles of ethics in business and corporate governance is to win the confidence of customers and investors of a business and to assure them of fair play in protecting their interests.


Ethics in Business—External Environment

The other important factor for the success and well-being of a business is its ‘external environment’; the success of a business considerably depends on how effectively the company deals with the same. Some important components of external environment are customers, suppliers, society, locality, government and municipalities, social and political conditions of the place where business is to be conducted, etc. Dealings pertaining to these components are as critical as the governance of internal processes and procedures in business. In effect, at times, external environment may impact the company’s business prospect much more seriously than its internal environment. Here are some such examples: a dispute with the trade union may cause stoppage of production (operations) in a factory for a long time; violation of the pollution norm may bring about the closure of a factory (by the Pollution Control Board); and an alleged breach of contract in the market may lead to long legal battles and cause loss of revenue, reputation and brand image. Similarly, a tussle within the locality and society where the company proposes a new business may lead to undue delay in project implementation and heavy cost overruns. These external issues—often very critical to the company’s functioning— are difficult to handle as they are not actually under the company’s control.Yet, because of some urgency involved or difficulties encountered in such cases, business practices tend to settle such issues by resorting to non-ethical means (bribing, influencing, threatening, seeking political 16, accessed on 4 August 2009

Ethics in Business and Corporate Governance

backing, etc.)—although such non-ethical practices may often complicate the issue. Here, Tata Motor’s proposal to acquire land and set up an automobile factory at Singur, in West Bengal, is a case in point: During 2006-08, Tata Motors had contracted with the West Bengal Government for the acquisition of approximately 1000 acres of industrial land at Singur to set up its prestigious small car factory17. At first, some landowners and farmers resisted in handing over their land due to inadequate price (as per their estimate). Somehow, the problem dragged on and a few other resistance groups cropped up to take advantage of this discontent of farmers and the adverse sentiment brought about by police action (on the protestors). Second, as this was a politically sensitive state, some political parties joined the farmers’ resistance, and the movement against the land acquisition was blown up out of proportion. Meanwhile, the company had already started building its factory and, hence, work at the construction site was frequently disrupted by political agitations against the land acquisition. Although this agitation was directly affecting the construction of the automobile factory, delaying project implementation, and pushing up the project costs, the company chose to leave the solution to the state government. The latter, it appeared, preferred to take a more legal view of the acquisition action rather than applying ethical and moral considerations of adequately compensating, resettling the affected farmers and working out a satisfactory solution for the farmers. Later, when the agitation and discontent was spreading fast, the government revised its compensation (three-fold value per acre of land); many farmers considered this inadequate because of the rapid appreciation in the value of free land in that area. Further encouraged by the political activism against the project, agitating farmers—expecting a more profitable deal under pressure tactics—resorted to a blockade at the construction site (where their lands were already barricaded to form a part of the project), knowing that the project would not be viable without this blocked portion of the land. Finally, the agitation—now led mostly by political activists—had gone so beyond the control of the government or the farmers (who had lost their land) that Tata Motors, promoter of the small car project, was totally discouraged by the situation and the resulting environment, and withdrew the project from Singur. Note: The brief description of this serious issue does not represent the entire facts or case history.

The matter went out of the hands of the government and the company, despite being legally correct (as per a Calcutta High Court judgment on this case instituted under PIL), because of the use of force and violation of moral rights of the farmers. A general view of the case has been that the authorities failed to handle the case effectively and ethically. Many apparently felt that the company, Tata Motors, did not manage the external environment of the project effectively, leaving that onus on the state government. As per news reports, failure to manage this external situation had cost the company a huge loss (over Rs. 300 crore) in direct expenditure incurred to relocate the project to another state and the delay in implementing the 17, accessed on 2 August 2009;, accessed on 8 October 2011

Law, Ethics and Business

project at the new site. Moreover, due to the delayed launch of the product, the project viability became questionable—at a time when the automobile market was already shrinking due to the global financial meltdown and the consequent effects on industries, consumer spending and global business. Analyses of detailed situations and efforts to resolve the issue might bring out many other angles to the problem, but from the business point of view, consideration of ethics and moral responsibility from the very start (negotiation with the farmers) could have reduced the degree of conflict and impact of consequent damage. It is generally believed that ethical consideration of the issues involved, decisions based on ethics and their beneficial effects on concerned people can largely reduce the conflict of interest between the parties, even in a politically sensitive external environment. The Singur case underlines the importance of managing the external environment in business, which is not under the regulatory control of the management but is influenced by the social, political and economic environments of the issue. The failure of Tata Steel’s Gopalpur project in Orissa, India, during mid-1990s is another example. The project did not take off due to problems (land acquisition and resettlement) which could not be effectively resolved. A similar instance is POSCO Steel, a company that is struggling since 2005 to set up its proposed 20 million ton steel plant in Orissa due to various external factors and environment18. Thus, there are many examples of industrial projects that were shut down due to failure in managing their external factors, especially with regard to social and ethical problems. Many agree that if these problems had been considered by taking into account the moral issues involved and moral responsibility for fair and just solution, the issue could have been satisfactorily resolved despite social or political agitations. This view is supported by the fact that POSCO’s recently reported move—to institute a socio-economic study and development plan of the proposed region of the factory—has turned the public opinion largely in its favour.Thus, the influence of external environment on business is not restricted only to social or political issues, it is equally prevalent in other areas of business, notably in matters of managing competition—either in procuring business orders or securing resources for the business. Unfair means and unethical practices to overcome competition in the market are often fraught with the danger of losing the business permanently or losing the goodwill and respect of society. Tall standing companies such as TCS (Tata Consultancy Services), Infosys and Wipro—known for their transparent and ethical business practices—bear the testimony of gain wherein ethics are held high in business practices. Another area of importance for ethics in India is the fast growing pharmaceutical industry where many cases involving the violation of intellectual property rights (IPR) are pending in different courts in India and abroad, especially in USA. Although (apparently) the violation of IPR happens due to the internal decisions of a company, it actually takes place in an external environment. Not so long ago, Ranbaxy, the reputed Indian pharmaceutical giant, was hit hard in the USA due to many drug related IPR violations—leading to a sharp fall in its stock price and loss of goodwill (ref:, accessed on 30.08.09). In July 2008, Ranbaxy was even 18, accessed on 30 July 2009;, accessed on 8 October 2011

Ethics in Business and Corporate Governance

accused of selling adulterated drugs in USA, a charge which the company contested as a plot to scuttle its deal with the Japanese pharmaceutical major Daiichi Sankyo. The complaint cited non-adherence to process discipline and hygiene in some of its manufacturing plants in India. Reportedly, this troubled situation has forced Ranbaxy to be bought out by Daiichi Sankyo and agreeing to working as a minor partner in the vast generic drug market in order to protect their international business. The Ranbaxy example goes to show how critical it is to manage the external environment in the modern competitive business, especially with regard to ethical conduct of business. Most of the onslaughts in the competitive and international business come from the failure of ethics in business practices. Concerned by the increase in violations of IPR and ethics in India’s pharmaceutical business (e.g., sale of spurious drugs) and the probable fallouts, the government has been forced to enact a law making the production and sale of fake drugs a non-bailable offence in the country, with life imprisonment and fine up to Rs.10 lac for those found guilty. Therefore, all business executives, particularly those dealing with the external environment, should be: (a) fully aware of their moral responsibility to the market, society, locality and environment; and (b) fully committed to ethical business practices. Such awareness comes from the organisation’s work culture, values and emphasis on ethics. The responsibility of institutionalising ethics in work culture and business dealings certainly rests with the organisation and its management—who are, for the stakeholders,‘trustee of their interests’. Making employees aware of their moral and ethical responsibilities in the operating environment is becoming increasingly important with the globalisation of business. As management consultant and India chief of Boston Consulting, Arun Maira, summed up: ‘Effective and ethical engagement with civil society would make businesses and MNCs (multinational companies) more sensitive to their environments and better corporate citizen wherever they practice’. In modern businesses, ethical practices are a key determinant for good corporate governance and citizenship. The ethical issues of business in dealing with the market, consumers, the environment and ecology—which are components of its external environment—have even wider implications. The ethical behaviour of an organisation in these external but integral aspects of business operations is seen as most critical for its success. In the competitive business environment, companies tend to manipulate market demands and pricing with curtailing and controlling, unfair distribution practices, exaggerated benefits vis-à-vis cost, and unfair inducements for purchase. In most cases, these have been proven to be short-lived; market and customers want a long-term relationship that is cemented with ethical standards in running the business. Every company has moral obligations to serve the market and the constituent customers with honesty, integrity and transparency. Customers invariably go to where the business is honest and transparent; where companies provide exactly what they claim. As discussed earlier, the true colours of a business are reflected not only in its adherence to laws but also in how it upholds moral responsibility for any consequences of the business and how ethically it deals with customers. Let us examine the aspect of environment management and protection as a moral responsibility of modern business. Many green-field industrial projects have faced serious objections or protests from the society for environmental reasons. Environment protection is one of the most

Law, Ethics and Business

morally challenged areas of operations in industries; managing this external factor of business is crucial to the society. Though most countries have enacted laws to protect the environment, several evidences of environmental pollution and damage emerge regularly from all around the world—in violation of those laws (or some loopholes in the laws). The most jarring case being of automobile pollution, as illustrated here: Almost all the developed countries including India now require that motor vehicles comply with the laws of emission standards, because of the effect of vehicle emission on atmospheric pollution and global warming. In some parts of the developing world, fume suppressant chemicals are added to the engine so as to suppress the smoke, which is considered the symbol of pollution. This suppresses black fumes and thereby gives an impression of reduced emission from the engine; however, it is also reported that this system is not an approved means of motor pollution control as it does not improve the combustion of the fuel. Thus, reduced emission may be an apparent compliance to the law, but it only gives rise to another possibility of pollution from the chemicals used as suppressants. The objective of emission standards is not to suppress smoke but to eradicate harmful effects of the emission from engines; therefore, the use of smoke suppressant is eyewash and morally wrong. In addition, the suppliers of smoke suppressants have the moral responsibility to check and ensure that the combustion products of these chemicals do not further damage the environment. However, the latter moral responsibility can be adopted only through the ethical principles of those who provide that technology (chemical suppressants for motor engines). Meaning, they have to feel duty-bound to the society to also examine the morality of their action and its effect on the environment. For instance, in Kolkata, an Indian city which is highly congested with old and fuel inefficient cars, environmental pollution due to two and three wheeled vehicles is said to be causing a high incidence of bronchial problems (especially in newborn babies), and cancer (of the larynx). It is, therefore, the moral responsibility of city administrators, the government and technology providers to act together to stop further damage to the society from environmental pollution. Responses to moral duty and responsibility can arise only from a sense of ethics and morality rather than from the urge to avoid legal embarrassment. Law alone cannot address the problem effectively. In fact, it has been reported that, despite many court directives (up to December 2008) to the concerned authorities, administrators have failed to effectively curb pollution in Kolkata. Incidentally, this city is no exception to the pollution problem, most cities across the world are subject to vehicle emission in varying degrees—Beijing, Rio-deJaneiro, Delhi, and Mumbai being some other cities with high population density and, hence, high vehicular congestion.

[Note: This case is adapted from the article on two-wheeler pollution in the city, published in The Telegraph, Kolkata, 23 November 2008 and 9 January 2009: ref: http://www.telegraphindia. com/1090109/jsp/frontpage/story_10365206.jsp, accessed on 14 October 2011] It is not the factory operations alone that are polluting the environment, even the products they manufacture are perpetually causing environmental damage. Motor vehicles, refrigerators, air conditioners, power generators, chemical fertilisers, electronic scrap, and plastic bags are just a few examples of production processes that pollute. They may be essential for modern living, but manufacturers or producers of these products have the moral obligation to ensure

Ethics in Business and Corporate Governance

that their products are eco-friendly or made to cause minimum environmental damage. The ethical consideration of protecting the environment should be a part of the focus of technology research and development in modern business (more on this has been discussed in Chapter 7). The problem of industrial pollution spreads from land, water and air, to ionospheres; though origins may be varied, the effects could be devastating. This multi-dimensional problem has to be viewed by industries and commerce not only in terms of laws but also in terms of moral duty in order to recognise the responsibility of preserving the ecology and environmental systems. Often, laws are enacted as after-effects of the consequences, but, in that time, the damage to humans and non-human beings has been done. For example, dumping huge amounts of toxic waste (e.g. discarded computers) on coastal seabeds has endangered marine life and ecology. In such cases, the law is of little help, but sense of ethics can act as a moral guard for leaders and other people in organisations to think proactively and initiate no action that can potentially damage the environment. Where the law flounders, ethics can work wonders. Thus, ethics in business and industrial operations are an essential factor for the prosperity of the society upon which all businesses ultimately depend. The significance of ethics in business, and the impact of their failure on the success of a company have become so great in today’s consumer-driven market that business leadership is being described as the process of strategically and ethically managing and influencing market and non-market environments in order to accomplish the vision and mission of the company.



If managing ethics in both market and non-market environments is a strategic necessity today, then who is responsible for institutionalising ethics and administering ethics in the organisation?19 There is no ambiguity about the responsibility of law in a business enterprise. Law and legal compliance is the responsibility of the company who manages the legal affairs through a team of in-house as well as external professionals (e.g. lawyers). While a company may have to bear the consequences of legal violations for all practical purpose, the responsibility of maintaining law lies with individuals who are made responsible and accountable for their actions based on the authority delegated to each. However, for ethics, there is no line of authority and responsibility; except that everybody in the organisation recognises the need for it. So, who should be responsible for ensuring that all members of the organisation follow the moral standards of behaviour in their dealings within and outside the company? An organisation comprises different layers of management with different responsibilities. Then there are vertical structures within a company that are responsible for specialised functions and processes—e.g. design and development, planning and manufacturing, shipping and marketing, finance and accounting, etc.—which are carried out by people with different attitudes, perceptions and value systems. How, then, can ethics be coordinated and integrated into the business process in such a diverse working environment? 19

While this aspect of ethics management can be left to another chapter, it is discussed here to clearly establish the way ethics work (or could be made to work). Next chapter onwards, discussions will be focused to critically analyse and illustrate applications of ethics in business processes, practices, professions, governance and environment management, as well as related outcomes, to demonstrate the benefits of ethics and the hazards of related violations.

Law, Ethics and Business

It is widely accepted that, like management processes, ethics and ethical standards in an organisation have to be built into the work culture, propagated by the leadership, practised by way of ‘leading by example’, maintained and audited for adherence, and coordinated among people and functions as basic requirements for all employees. Leaders and managers have the responsibility to create a work environment and work culture that foster ethical practices; everybody in the organisation has to be in sync with ethical standards and practices, otherwise ensuring ethical behaviour among all the employees in a big organisation would be difficult.Yet, the question remains: who is responsible for ethics, the company or the concerned employee? It has been mentioned earlier that, in a business, the ethics of an individual is the responsibility of that individual himself or herself. In other words, the unethical act, if any, should be done on his or her own accord and should not have been forced upon that employee. Yet, often, many activities in an organisation are collective wherein people work as group, and the products or results are the outcomes of such joint efforts. In such cases, if anything serious goes wrong and is morally incorrect, then who should be held responsible—the group or an individual? And, what should be the overall role of the organisation in ensuring ethics? Here, it may be beneficial to re-examine afresh the issues involved and the methods of institutionalising ethics in an organisation. Industry today is equipped with modern quality management systems in order to ensure quality in total business practices; quality systems such as ISO-9000 and TQM practices are especially designed and directed to institute quality in all business operations.With these quality systems, a company aims to ensure that its customers get what they want (i.e., satisfy customer needs and expectations). In turn, to ensure this outcome from the business, these systems demand fair, transparent and value-based approach to management with a focus on customer satisfaction and customer loyalty. The term ‘customers’, with reference to quality systems in modern business, refers to all those with interests in the company’s business—e.g. shareholders, employees, suppliers, customers, society, etc. Any loss or damage whilst protecting the interests of its stakeholders is taken as a failure of the total quality practice; the company is then required to strengthen these areas with new initiatives and corrective actions. A closer view of any of these total quality systems shows that: (a) the system has to have enough elements of ethics built into the systems to ensure protection of customer interest; and (b) designing, adopting and managing the system is the responsibility of the top management in the company.This, however, does not absolve an employee from the responsibility of following the implemented system in the true spirit of quality. Thus, if an employee violates the established systems or standards of practice, the responsibility for the consequences rests with that employee and disciplinary action may be taken against him or her. However, if the violation has been forced upon the employee by the management or a superior authority, then the responsibility rests with that person or body who ordered it. The ‘total quality’ system, therefore, has striking similarity to ‘ethics management’ in a company—both include the responsibility of individuals and authority. It is this likeness between quality and ethics in business that has prompted the concept of ‘total ethical practice’ (TEP) in keeping with the aspects of TQM. Ethics can, however, be best integrated with thoughts and actions of business executives through ethics education in all business programmes. To quote a management expert, ‘ethics

Ethics in Business and Corporate Governance

have to be interwoven into both undergraduate and graduate courses, besides the requirement for mandatory classes on ethics. Like with any other practice, the ability for ethical decisionmaking improves with implementation. And, like any other subject, ethics cannot be taught in the classroom alone; companies and organisations owe it to their stakeholders to create a culture of principled decision-making.This requires a genuine and sincere focus on: appointing the right people; ensuring a strong tone at the top (as well as in the middle and at the bottom rung of employees); establishing a meaningful code of conduct and educating employees about what it means for each one of them; giving information about the laws that apply to particular work areas and employees; training in general ethics; enabling the reporting of wrongdoing in an independent and safe way; handling ethical lapses with discipline; and establishing strong controls, risk management practices, regular surveys and assessments.Though long, this list sums up the needs and methods of ensuring ethics in business. The practice of ethics in business is closely intertwined with the work culture and attitude of the people in the company. In corporate structures, a large number of people carry out activities in adherence to certain systems and procedures, and as a part of their individual job responsibility or as per instructions given to them (but leaving scope for individual behaviour). Thus, responsibility for ethical behaviour basically rests with the company’s employees, while the company is responsible for (a) promoting systems and culture of ethics in the work environment; and (b) not promoting or abetting or aggravating those immoral acts or wrongdoings that are within its jurisdiction. In fact, the company (or its leaders) should take the initiative to introduce and cultivate ethics as a serious driver of business, taking the first step to formulate an ‘Ethics Statement’ which may be in line with its ‘Quality Statement’. This statement must then be communicated to all employees, and publicised widely so as to promote strict adherence by all without exception. Many companies also appoint an ‘Ethics Counsellor’ or an ‘Ethics Committee’ to promote ethics in the workplace and to monitor any violation of ethics in its business practices. More significantly, the primary purpose of an ethics committee is not to punish people for violation of ethics, but to make them aware of the importance of ethics and to prevent any indulgence of unethical practices within the company. Given the serious impact that any violation of ethics has on the overall business, ethics committees are often empowered to directly report such violations to the highest authority (e.g. board of directors). However, it would be morally incorrect for any company to take action against any employee without clearly defining and communicating the desired standards of behaviour in various areas of his or her responsibilities. Hence, companies are also required to establish—and make known to all employees—the acceptable ‘standards of ethical behaviour’ in different areas of business, like sales and marketing, accounts and billing, contracts, recruitment, appraisals, quality certification, after-sales service, workplace conduct, conflict resolution, environmental action, handling of physical and intellectual property, etc. To deal with any violation of such standards, the company must appropriately prepare or upgrade its standing rules and regulations.The spirit behind this modern business approach to ethics is not to punish people as a post-fact incident, but to prevent violation of ethics through awareness building, training and an ethical work culture. The purpose of ethics in business is to provide its people with the moral power to prevent any wrongdoing.

Law, Ethics and Business

And, people are morally bound to exercise this privilege in both internal and external environments for effective discharge of duties and responsibilities. An employee may fail to adhere to ethical standards of behaviour under different circumstances. While evaluating responsibility for a violation of ethics and its consequences, the process of moral reasoning should first ask if the omission was intentional or done under instruction from a higher authority20, or if it was due to inability or, simply, a mistake. Here, if the concerned individual knew that the act was morally wrong—even if he or she was following the orders of a superior—then the individual cannot absolve himself or herself from that responsibility (of violating ethics). This is because that individual had the right to judge if the order of the superior was ethically and morally reasonable, before accepting and executing the same. The refusal of an order to commit an illegal or immoral act is perfectly acceptable under all service conditions; however, in cases where such an act is wilfully done—with or without the instruction (or co-operation) of a higher authority which is not legally or morally correct— both the individual and the authority are held responsible. For example, if a pharmaceutical company is manufacturing spurious drugs and a salesman is knowingly selling it, then both the manufacturer and the seller are responsible for the violation of law as well as moral standards and are both responsible for the consequences and damage caused by the action. On the other hand, if the salesman had no knowledge about the spuriousness of the drug, and his violation was unintentional and of his own accord, then the manufacturer is solely responsible. However, at the same time, the salesman has the moral obligation to know (learn) about the product he is dealing with, and must make reasonable efforts to know about it. Thus, the responsibility of the salesman cannot be totally mitigated or excused on the grounds of ignorance. At this point, it may be remembered that both the management and the employees of a company have the moral responsibility to conduct business ethically. The management has to institute systems, procedures and methods to ensure and monitor ethical conduct of business operations, and the employees have to apply moral principles in carrying out their activities and responsibilities.Yet, the foremost important factor is the honesty and morality of individuals involved with the business. In a business, if individuals are intent upon behaving unscrupulously and damaging the interests of others, then the company can do very little to stop this violation of ethics—despite having laws and regulatory bodies. Referring, yet another time to the Satyam case, the staggering losses to the stakeholders had been brought upon by a few unscrupulous individuals at the top who had meticulously planned this scam well before the execution. Apparently, laws and regulations governing the business were not only brushed aside with the help of other willing individuals, but they also failed to detect the fraud before the damage was done. Satyam is a classic case of how human dishonesty and immorality can hurt a business, the society and the nation. It is a challenge for modern society and business regulators to check and control such violations of morality and ethics carried out by unscrupulous individuals. While many feel this is best done through training (in moral behaviour) and by promoting a good (moral) work culture in the company where the top management leads by example. As stated earlier, where the law flounders, ethics work wonders. 20

Here, ‘authority’ refers to a superior in the line of authority and responsibility, be it the immediate boss or go up to the chief executive of the company.

Ethics in Business and Corporate Governance



Response to ethical responsibility in a business is best reflected through the quality of ethical decisions in the business. Ethical decision-making in business is no doubt a complex job, but it is very much essential. The complexity of modern business environments, the plurality of society, and diverse attitude and interests of people associated with businesses complicate ethical decision-making in business. Conflicts relating to ethical business practices arise from perceived privileges and rights of individuals working in a business, obligations and responsibilities of the business vis-à-vis its different stakeholders, traditional corporate motive of profit maximisation and distribution between a few people, and the increased pressure of social responsibility. The ethical dilemmas arising from these conflicts hinder the resolution of ethical issues facing a business. The necessity of ethically responsible business operations and practices is widely acknowledged. But opinions vary about what these practices are, their exact shortcomings and what they should be. As such, ethical decision-making in business is often masked with difficulties, complexities and some degree of confusion. The purpose of this section is not to discuss again the ethical decision-making steps, but to highlight various issues confronting ethical decision-making in business and deliberate ways and means to resolve them. The ethical decision-making, ethical dilemmas and their resolutions has been discussed in Section 1.6. The process of ethical decision-making discussed there, which is applicable to business situations and environment, is not different from the process of making decision under ethical dilemmas. They all shall be guided, at least theoretically, by the ethical principles mentioned there that is, by referring to the utilitarian approach, the rights approach, the fairness approach, the common good approach and the virtue approach. Steps for analysing the issues involved in ethics or ethical dilemmas would also remain valid as discussed in Section 1.6. What relatively makes ethical decision-making difficult in business situations is not the process but the practice. The central questions in the practice of ethics and ethical decision-making in business are: (a) Who are responsible for ethics in an organisation? (b) What sort of commitment to ethics and ethical standards those people have? (c) What is the extent of freedom they have for decision-making? (d) What are the constraints they face in the organisation—either imposed from outside or in the natural course of their duties? These questions crop up because of the fact that organisations act, in practice, only through those who have the responsibility and authority to act for it. Hence, the individuals who can act for an organisation have to assume the moral responsibility for ethical decision-making. Their ethical commitment, perceived notions and fairness, job conditions and constraints and, above all, their freedom to act, if they want to, under a given situation come into play in the game of decision-making in real-life business situations. Therefore, central to ethical decision-making in business is the corporate structure that empowers individuals to act as ‘free moral agents’ for ensuring ethics in the workplace and in all business transactions. Unfortunately, in the present corporate structure, managers or common managerial levels are not ‘free moral agents’, meaning that they are mostly not free to take any moral stand or ethical decision even if they want to. This lack of moral responsibility in an organisation stands

Law, Ethics and Business

in the way of consistent ethical decisions. Today’s organisations are, perhaps, more concerned with the rationality of a decision rather than its ethicality, and rightly so, especially from the strategic management point of view. But, why rationality and ethicality cannot be combined in a decision or strategy? Are they very different in their objectives? They are both based on the rationale of reasons and principles, justifying a decision. The process shift required to combine ethics with rational decision-making by managers is not much either. Along with the factors of ‘risk, cost, timing, and resource limitation’ considered for analysing strategic alternatives, ethical imperatives or compliance with ethical standards also need to be examined to arrive at the best solution. Even for strategic decision-making for the external environment of business (e.g. for the market, competition and regulations) ethical consideration and direction are important for consistency, acceptability and success. Examination of ethical standards and morality of actions have to be part of the decision-making system of business organisations if they are sincere about ethics in business. And, accordingly, corporate structures and systems for decision-making have to be designed and incorporated in day-to-day practices. Ethics is no longer an optional requirement to run a business for growth and sustainability, rather ethics has to be a part of the business. If it is so then ethical decision-making (i.e., ensuring that a decision meets the expected ethical standards and fairly addresses the moral issues involved in the concerned case and actions) turns out to be a ‘critical success factor’ (CSF) for any business. There are few suggestions as to how ethical decision-making in an organisation can be formally structured and improved, namely: (1) The Agency theory21 recommends the induction of a professional ethicist at the board level, who should promote, monitor and control ethics and ethical standards of corporate actions and decisions. In the corporate structure, the board is the head of operations. It represents all stakeholders, including shareholders, employees and others related to the corporate ownership and functions. Hence, a professional ethicist at the board level might make sense for effective control of ethical standards in the company. But, effective control from the top means limiting the decision discretion of shop-level managers, which creates conflicts and very much lessens the ‘moral responsibility’ of managers in the organisation. However, some experts feel that such a position at the board level can certainly monitor and mediate conflicts between profits and ethics in the corporate vision and purpose thereby minimise ethical disparities in the corporate work culture. (2) Another suggestion is the ‘shareholder referendum’ for approving controversial decisions. But this method is fraught with lots of limitation due to regulations permitting varieties of shareholding patterns. Besides, a large number of shareholders remain non-responsive to such questions. Similar to this referendum type approach, many companies are nowadays posing important ethical issues in some kind of ‘open dialogue’ to their senior executives to elicit their views and new directions. This approach leads to two effects: one, it increases the awareness of executives about ethical issues confronting the organisation; and two, the executives’ increased commitment to decisions arrived at by such process. 21, accessed on 28 September 2011

Ethics in Business and Corporate Governance

(3) Other approach could be a two-step approach: (a) first controlling ethical discipline in the organisation through standing rules and codes of behaviour for articulating the character or good habits that employees should acquire and display, and then (b) introducing system of solving ethical conflicts of decision and action through the principle of normative ethics. Such an approach will help establishing general moral standards in the organisation, guiding the people in the organisation how to judge right from wrong, or good from bad, and how to live moral lives.This may involve identifying duties that we should follow or the consequences of our behaviour on ourselves and others. Finally, the decision should be based on the theory of the greatest good for the greatest number as far as possible within the moral jurisdiction of the authority and the normative approach. The normative approach implies ethical behaviour centred on the rights of others and follows the Golden Rule22. This approach to ethical decision making allows considerable discretion as it relies on value-based beliefs and attitudes. In the ultimate analysis, ethics are value-based and stem from socio-economic consideration of the well-being of all stakeholders. Corporate engaged in business must appreciate this aspect of ethics while developing the framework for ethical decision-making, otherwise there will be conflicts from within. A major challenge in ethical decision-making is how to overcome the complexity arising from the issues concerning different stakeholders. Any approach to ethical decision-making in business must take into account the interests of its stakeholders and other legitimate beneficiaries. An illustrative view of business and its stakeholders is presented in Figure 3.5.






Figure 3.5 Stakeholders and Beneficiaries of Ethical Decisions in Business (These stakeholders are not ‘either/or’; they are together.)

22, accessed on 16 November 2011

Law, Ethics and Business

The model, shown in Figure 3.5, envisages the necessity of taking business decisions keeping in view what is ethical for all the stakeholders (that is, the company’s shareholders, society, employees and the environment). Legitimate and moral considerations of society, environment and employee welfare, which should also protect the interests of shareholders, should be the cornerstone of ethical decision-making. Corporate governance, which is the framework of decision and direction in a business, is often tilted towards shareholders’ interests. However, this skewed approach of corporate governance is not considered appropriate in today’s business environment if a business has to ensure growth and sustainability in the long run. Business decisions should be ‘checked and balanced’ for all stakeholders rather than focusing solely on profit maximisation for shareholders. There is a need to give space to decision makers who allow social, employee and environment contexts in the decision-making process. Ethics do not, and need not, present profit as the dirty word of business. However, we should appreciate the fact that profit could be the aim of good corporate governance, the ultimate outcome would depend on the ethicality of business aims and actions. If the business aim is ethically wrong, its decision-making system will also be faulty. Here, we are not talking about the legality of business objectives, but their ethicality. If law is the man-made ‘deity’ for common worship, life into the deity comes from ethics. Ethics, and the sense of respect for ethics, establish the social-view into the governing laws by sensitising the laws with social and environmental necessity. When law and ethics combine, their formidable force helps create a good and healthy society. Then business being a part of this society is expected to be functioning ethically. For prosperity and growth of business, we require both law and ethics. But obeying law or deciding about the legality of an action is easier than deciding whether the action has been ethical.Those taking ethical business decisions must ensure that their decisions should not harm the interests of some stakeholders of the business. Because serving the interests of a particular section of business stakeholders is not an ‘either/or’ choice. The interests of all stakeholders need to be served together. All business decisions should be ‘checked’ on the basis of this approach and ‘balanced’ by ethical principles and practices. In view of the above discussion, the ethical decision-making system of a business has to be a well thought out structured framework to ensure ethical consistency of decisions. To put in place such a system, from the ‘agency theory’ may be followed or an ‘ethics officer’ may be appointed at the top. The ‘ethics officer’ should frame, direct, monitor and guide the efforts to make the organisation an ethical workplace. Ethics and ethical filters should be used to ensure integration of profit maximisation and social welfare maximisation.Two key considerations must be included in the ethical decision-making framework: (a) There must be a clear understanding of what constitutes acceptable ethical behaviour, and (b) There must be an effective mechanism for ensuring that the company follows ethical practices. Without ethics and an all-inclusive governance process, businesses are likely to take a turn to a blind alley. Therefore, to infuse ethics in its business operations, an organisation requires a built-in framework of ethical decisionmaking. Such a framework should be appropriately designed, structured into the organisation’s hierarchy, communicated widely and dedicated to all concerned by the top management (e.g. the board). This would ensure consistent growth and long-term sustainability of the organisation’s business. Remember, ethics is the sole saviour of business in the long run.

Ethics in Business and Corporate Governance

Summary 1. The chapter aims to develop: (a) interrelationships among law, ethics and business; (b) the role of ethics in different business environment; and (c) the responsibility for ethics in business. 2. The chapter discusses the scope of law and ethics in business and offers examples to show that, while both are required to regulate and control ‘good behaviour’ and ‘good effect’ of business, ethics often go a step beyond laws by encompassing wider social issues involved with or affected by the acts or decisions. It also points out that ethics and compliance to ethical standards in business not only work in preventing damage done to the interests of people and the society (by taking broader issues into considerations), but also help in furthering the business interests (by creating goodwill and customer loyalty). 3. Ethics cover a wider range of social issues by referring to (self-imposed) moral responsibility of actions or decisions, either as individuals or as a company. Ethical standards of an individual are not established by any authority but are set by one’s own judgement based on knowledge (or understanding), logical reasoning, feeling, morality and guidance of the conscience. 4. In many cases, law and morality may coincide and the obligation to obey laws becomes the same as the obligation to be moral. Similarly, to be moral and ethical, one has to obey the laws. Throughout the chapter, there is an emphasis on the complementary role of ethics and law. Since implementation of laws and institution of ethics and ethical governance is primarily ‘person dependent’, the chapter elaborates the role and responsibility of individuals vis-à-vis their official and business roles in maintaining law and ethics in the organisation. 5. Business organisations are set up in keeping with laws and these laws permeate all business activities. Business being ‘an immortal fictitious person’, the approach of law in dealing with a typical business situation has been outlined and illustrated in terms of the responsibility of its key personnel (top management) and various regulatory mechanisms of law vis-à-vis ethics. 6. It has been established that if the process of self-examination can be instituted in the thinking and working of employees in business—to determine what is ‘morally right or wrong’—it may help to drastically minimise the risks associated with immoral and unethical activities in business. 7. Law and ethics have to join forces to best harmonise and optimise benefits to the society, people and stakeholders of a business. At times, law alone may be unable to bring out the best solution —for which it is necessary to examine social and ethical issues involved with the action or problem. This is particularly true for emerging areas of modern business, such as IT services, BPOs, financial institutions, advertising, etc. 8. Business is not run or managed by one individual, it involves many individuals who are linked with each others’ actions and their outcomes. Hence, the responsibility of ethics in business actions requires further clarification. If any unreasonable or immoral act occurs in a business, then law-enforcing agencies may need to name the officials or employees responsible for that wrongdoing or harm to the employees and society; ethics and ethical practices, on the other hand, have no such facility owing to their self-regulating nature. 9. Good corporate governance calls for the prevention of fraud or damage to the interests of stakeholders. Therefore, the organisation must have a mechanism in place to promote and control its internal environments for a good and ethical work culture. In compliance to this spirit, companies are required to set up internal mechanisms such as an ethics committee,

Law, Ethics and Business





ethics counsellor, promotion of the code of ethical conduct, monitoring systems for ethics, and transparent rules and regulations in order to deal with violations of moral conduct and ethics. Business operates in two kinds of environments—internal and external. A company cannot work in isolation of these environments, which often interact with each other through the actions chosen by those people who are involved with or run the business. These factors are not independent; they are interdependent for results. The success and well-being of business in modern social and economic environment are dependent on how well the enterprise deals with these factors and situations arising from. This chapter attempts to describe, illustrate and discuss the features of business environments and highlights the significance of effectively dealing with the same. The necessity of ethics in business—a subject that will come up time and gain in this book—has also been discussed in this chapter. It has been emphasised that like management processes, ethics and ethical standards in an organisation have to be built into its work culture, propagated by the leadership, practised by way of ‘leading by example’, maintained and audited for adherence, and coordinated among people and functions as basic requirements for all employees. Ethics are an essential ingredient of good governance, and good governance, in turn, is essential for the longterm success of business. Finally, issues and ways of ethical decision-making in business have been critically discussed and few methods of structuring the decision-making system, including a model of inclusive decision-making, have been discussed. It has been pointed out that business decisions should have checks and balances to serve the interests of all business stakeholders instead of focusing solely on profit maximisation for shareholders. There is a need to give space to decision-makers who allow social, employee and environment contexts in the decision-making process.

Key Words and Concepts Law, ethics, business, controls, regulations, morality, fairness, scams, employer-employee obligations, legal view of business, moral responsibility, moral constraint, land acquisition, Government, social justice, public interest litigation (PIL), anti-trust, cause and effect, ideology, marketplace, environment, corporate social responsibility (CSR), systemic, code of conducts, code of ethics, GAP of USA, internal environment, external environment, violation of IPR, ethics committee, ethics counsellor, board of directors, responsibility for ethics in business, toxic wastes, environmental damage, pollution, total quality management (TQM), total ethical practice (TEP), ethical decision-making.

Exercises Check Your Progress 1. 2. 3. 4.

The history of development and progress of business across the world shows that ___________ The purpose of business is to ___________ For ‘good effect’ on both business and its clients, there is a need for ___________ Obeying the laws of the land is a part of ___________

Ethics in Business and Corporate Governance 5. The law treats the modern business organisation as ___________ 6. In the eyes of the law, ___________ are made responsible for the consequences of a company’s action(s). 7. To strengthen the enforcement of laws and moral behaviour in an organisation, there should be a system of ___________ 8. There is ample evidence that companies pursuing unethical business practices for profits are often faced with ___________ 9. Ethics in business cover not only the people of the company, ___________ 10. In business, the external environment is ___________

Review Questions 1. Discuss the relevance of ethics vis-à-vis law in business. 2. Despite the fact that business is treated as ‘immortal fictitious persons’ and cannot have its own feelings, how are law and ethics applied to business. 3. Critically discuss how uncertainty, difficulty and minimal involvement can diminish a person’s legal and moral responsibility. 4. Discuss with illustrations: ‘The employee’s duty to serve his employer is limited by the constraints of morality’. 5. Justify the statement: ‘Ethics stand as the moral guard against what is unjust and unfair’. 6. Compare and contrast the management of ethics in the internal and external environments of business. Why is the ethical management of the external environment often regarded as the ‘controlling factor’ for success in a green-field project? 7. Develop a model of ‘ethics administration’ in a company of your choice based on the understanding of how law, ethics and ethical governance work in business enterprises. 8. ‘Effective and ethical engagement with civil society would make businesses and MNCs more sensitive to their environments and better corporate citizens wherever they practice’: Justify the statement with illustration. 9. ‘Ethics help to harmonise and reconcile the conflicting interests of various stakeholders in a business’: Justify the statement and illustrate your answer with examples. 10. What should be the aim while establishing ethics in a business? List a few important concerns of business ethics in practice. 11. Critically discuss who should be responsible for following ethics in business and what care should be taken in ethical decision-making in practical business situations. Why the (natural) environment protection should be part of the ethical decision-making system?

Further/Suggested Reading 1. 2. 3. 4. 5. 6. 7. 8.

The Concept of Law; H.L.A. Hart, Clarendon Press, Oxford, 1961 Natural Law and Natural Rights; John Finnis, Clarendon Press, Oxford, 1980 A Pragmatic Approach to Business Ethics; Alex C. Michalos, Sage Publications, Thousand Oaks, 1995 Morality and Business; Henry J. Wirtenberger, Loyola University Press, Chicago, 1962 Business Ethics: Concepts and Cases (6th ed.); Manuel G.Velasquez, Pearson Education, New Delhi, 2002 Corporate Communication—The Age of The Image, S.H.Venkatramani, Sterling Publication, New Delhi, 1998 Management Principles & Practice; S.K. Mandal, Jaico Publishing House, Mumbai, 2011 Business and its Environment (3rd ed.); David P. Baron, Prentice Hall, New Jersey, 2005


Chapter Objectives

Ethics: Individuals and the Organisation To outline the nature of an organisation and how organisational work culture can influence the ethical behaviour of individuals To discuss the rights and obligations of individuals in the organisation To discuss ethical behaviour of individuals vis-à-vis ethical responsibility in the organisation To discuss different facets of ethical issues in human resource management To discuss cases of individual ethical violations and their effects in order to bring out the importance of individual ethics for the success of business

Ethics in Business and Corporate Governance

INTRODUCTION ance ern ce Gov ernan ate Gov nance por Cor orate over nce and Corp ate G erna s ov d nce or nes usi ess an Corp ate G erna B or n d p in Gov usi an ics B ness nd Cor orate Eth ics in usi orp sa Eth s in B usines and C ic s B Eth ics in usines th B E s in ic Eth

1 and,28804,2021097_202326 2,00.html, accessed on 8 October 2011 2 and, accessed on 8 October 2011 3, and, accessed on 8 October 2011

Ethics: Individuals and the Organisation

Thus, it is the individual and the individual alone who is at the centre of each financial fraud—bringing misery and losses to thousands of investors, employees, service providers and the society. In the business world, stories of such known colossal scams are aplenty, demonstrating how real health and sustainability of an organisation depends on the individuals running it and from whom the powers and actions emanate. Howsoever prosperous the business may be, if its functionally important individuals are devoid of ethics and are bent upon making money for themselves at any cost, the business organisation as well as the livelihood of employees, investors, public and the society are put at great risk. Preventing this kind of victimisation of unsuspecting customers, stakeholders and the society by such unscrupulous individuals in different fields of business is the challenge to governments, regulators, management experts, moral philosophers and ethical protagonists. The importance of individual ethics and the role of individuals for the success and wellbeing of a business were discussed in the previous chapters: Chapter 1 took into account the issue of morality and moral standards of individuals for ethical behaviour; Chapter 2 threw light on the principles of ethics (rights and duties, justice, fairness and care) that are integrated and reflected in an organisation’s work and work culture by the action, participation, behaviour and motivation of individuals through whom a company’s actions flow; Chapter 3 pointed out the role and responsibility of individuals in establishing and maintaining legal and ethical compliances with a company’s work. Furthermore, Chapter 3 goes on to discuss ethical issues, tasks and practice of business ethics by referring to a business as ‘an immortal fictitious person’ (because, unlike a mortal person, a business cannot sense, feel and judge ethics—unless the individuals running it take that onus upon themselves). And, within the framework of this individual responsibility, the latter chapter also discusses the need and means for an ethical business practice. Thus, considering the fact that individuals play a very pre-eminent role in the ethical conduct of business—whereby the interests of its stakeholders and the society is maintained—this chapter is designed to re-emphasise and further elucidate the role and responsibility of individuals with special reference to the internal nature of a business organisation and its business.

4.1 ORGANISATION AND THE INDIVIDUALS To know about the expected ethical behaviour of individuals in an organisation, it is necessary to understand what an ‘organisation’ is. It could refer to as ‘rational organisation’, ‘political organisation’ or the ‘caring organisation’ or a combination of all these.

Ethics in Business and Corporate Governance

Rational organisations are those wherein the activities of a number of people are coordinated for the accomplishment of some common explicit purpose or goal, through the division of labour and function along with a hierarchy of authority and responsibility. However, the goal directed and structured organisation of business firms are though near ideal, but seldom do such ideal business firms exist in practice. Unfortunately, organisations are often embroiled in controversies involving unfair resource allocation, arbitrary treatment of superiors, politics of promotion within the company, extra-constitutional force of some individuals, and controversies over the path and goals of the company, etc. Therefore, it is quite common that companies, in their functioning, generally focus less on rational aspects and more on political features. Political organisations, unlike the rational model, seldom look merely at the formal lines of authority and communication within the organisation. They do not behave in a purely rational way and do not accept that rationality is sacrosanct in achieving the business goals and objectives. These organisations view business as a system of competing power and formal and informal lines of communication for coalitions. In this regard, Figure 4.1 offers a schematic example of the coexistence of rational and political organisational structures. Rational Organisation Structure


Head (President) VP-Operations




Divisional Managers

Departmental Managers 1



Political organisation set-up within a rational structure

Figure 4.1 Illustration of the Coexistence of Political and Rational Organisation. Political organisation (as indicated by numeral 1, 2, 3 etc.) are often an informal group within the rational organisation that influences the decisions of an organisation.

Thus, both organisational concepts can exist within the same company, i.e., there is an interplay of the characteristics of both rational and political natures in the behaviour of its people or employees.Yet, while they can coexist, it is the dominant group that rules the nature of the organisation. In a rational organisation, the goal is defined by the top management which assumes that it has the right to make such decisions. And the people down the line, in this organisational structure, are driven to achieve this goal by the duty-responsibility-accountability relationship. On the

Ethics: Individuals and the Organisation

other hand, in a political organisation, individuals are seen to form groups and coalitions to bargain and compete with other groups for more power, resources, benefits, etc. As a result, goals in such a set up are those that are established by the power centres; the goals may not be aimed at as in the rational organisational goals such as productivity, cost efficiency, marketing, etc. Government offices, public sector companies, and professionally managed private sector companies are generally rational in approach, though there are also some influences of political grouping in these organisations. Many family-run businesses and not-so-professionally-managed small and medium sized private sector companies resemble—more or less—the political model. Caring organisations are not focused to the pursuit of profits and personal gains, but are involved in caring for those for whom the organisation has been designed, with whom it interacts, and the people in the organisation itself. For example, NGOs, a trust or society constituted for a particular cause, voluntary organisations, and those where caring for all those connected with the business are seen to be important, e.g., microfinance groups. In a caring organisation, the employers may grow closer to their employees and seek the ways to serve and care for whom they exist, e.g., employees, customers, society, stakeholders, etc. Here, let us examine the case of a sudden decline in business due to bad market conditions and the resulting need to cut production level. In this case, a political organisation may try to terminate the employment of some people working in the department most affected by the slowdown, if they are not protected by service contracts. In contrast, a rational organisation may only reduce work-shifts and redistribute manpower to accomplish the target of revised output—thereby decreasing the scope of earnings for individual employees but protecting their jobs. Quite distinct from the approach of the previous two models, a caring organisation may take people out of the affected department and enrol them in a programme with a view to re-train or upgrade their skills without terminating employment or compromising their wage-earning opportunities.

While this example illustrates different approaches, different organisation models can also bring about variation in organisational practice. In other words, there may be very few or no organisations that are purely caring, although this approach may make immense sense in a competitive environment with growing social demand. Contrary to what people fear, this type of approach to business or activities is not self-destructing, but is constructive and conducive to growth. Here, growth refers to the overall development of the business environment and the well-being of society, both of which are essential to support the growth of business in a country. In fact, in today’s knowledge-driven business, human capital is becoming the most critical resource for survival and growth. Hence, in knowledge-based industries like IT, R&D, financial management, etc., companies are adopting more and more hybrid organisational structures and work cultures by combining the positive characteristics of rational as well as caring approaches. In practice, caring means developing relationships with customers, suppliers and employees, seeking to develop and improve the well-being of those whom the organisation serves or is

Ethics in Business and Corporate Governance

served by. This is true for professional practitioners like salesmen (marketing), doctors (medicine), lawyers, accountants, social workers (NGOs), etc. This type of organisational culture cannot be solely described as rational (where contractual model outlines the approach) or political (based on the notion of power that can be applied within moral limits). Perhaps, this caring approach can be best brought about by developing a culture of care in the organisation, where issues are addressed keeping in mind moral reasoning and ‘ethics of care’. In caring organisations, trust develops between interacting and connected people as (each) one sees oneself as interdependent. In a rational model, ethics focus on the contractual obligations of the employer and employees, whereas in a political model, the central ethical issues are guided by the constraints of morals or laws of the land (whichever allow the maximum use of power to enforce a decision). For example, in a political organisation, if an employee meets with an accident while at work, the company will try to compensate him only to the extent that is dictated as per the law or by a political force (e.g. trade union); the company may totally overlook the ethical part of its obligation arising from ‘duty of care’. The political approach of an organisation is through consolidation of power and influence through coalition. Most employer and employee rights (right to punish, union rights, right to organise, right to fair wages, etc.) in a political organisation are brought about mainly through the bargaining power of individuals—without the presence of most elements of rationality. Thus, moral and ethical issues of individuals in an organisation are influenced by, and dependent on, the nature of the organisation and its work culture. Many experts, therefore, feel that for ethical conduct in business, there is a need to change (or transform) the organisation’s character and style of functioning through a blend of rational and caring approaches. In fact, in present-day business organisations, this change is being led by the practice of and development in ‘human resource management’.

4.2 RIGHTS AND OBLIGATIONS OF INDIVIDUALS IN THE ORGANISATION Rights devolve from the top in the organisation where power rests. Therefore, to understand individual rights, it is necessary to first understand how the organisation is functioning in that specific context. In an organisation, (1) top management constitute the centralised decisionmaking body; (2) these managers assume (or are delegated with) power with decision-making authority that allows them to enforce managerial decisions to hire, fire, promote, demote, reward, punish, etc.; (3) decisions of these managers determine the benefits, status, freedom to communicate, freedom to interact among the employees, work environment, etc.; and (4) these managers distribute economic benefits and rewards through an authorised power structure and the informal power they hold, and thereby they effectively share and control the power that matters to govern the employees. This ‘flow of power to govern’ is also true for government organisations, but in government or public sector organisation this power mostly comes through ‘consent’ and not ‘ownership’ as in private sector business, because, with reference to Indian public sector companies, government organisations are established by the Parliament (a body of representatives elected by the public). Hence, there is a limit to the power and delegation (of power) in government controlled organisations; things happen only through the consent and approval of the designated approving authority who, in turn, follows the guidelines or rules

Ethics: Individuals and the Organisation

governing his or her employment duties and rights. In the privately run corporate sector, top managers rule as per the organisation’s authority and responsibility chart—which is also the line of command accepted by the employees as per their employment contracts. It is understood that they (employees) have freely chosen to work under that system and that it is their duty to obey and follow the line of command. Another superimposing factor in this power structure is the trade union which, in most government and private organisations in India, plays a powerful role in influencing employee rights and obligations. Thus, in a workplace, an individual’s rights are mainly moral and contractual, the usage of which is influenced by the outcome of his or her interactions as per the power equations within the organisation and the laws governing the same. The nature of the organisation and its power-mix greatly influence the rights and obligations of its employees and the individual behaviour in the organisation. The rights of individuals are also intricately joined with the duties, be it a contractual obligation or one that is mutually understood. The main moral duty of an employee is to work as per this obligation, to achieve the tasks assigned to him or her and to avoid activities that may harm the goals of the business. Any deviation from the contracted or mutually understood duties would be wrong and judged as unfair (unethical) to the organisation—provided the work assigned to that individual is not illegal or immoral or hazardous for the self or society. However, if the individual were to lose some regular benefits (bonus, increment, wage hike, etc.) due to this wrongdoing, then the organisation cannot be called unfair. Individuals in an organisation have the right to these benefits as long as they perform their duty (either contractual or mutually understood) to the best of their abilities. Let us study this vis-à-vis the scope of employee duty and failure thereof: A marketing employee is duty-bound to work, explore and enhance the sale of products of his company. If he does not put in his best efforts to improve sales or achieve a reasonable target, then he is considered as failing his duty. And, as a consequence, he may lose some benefit or is punished for continual failure, the company cannot be blamed for wrongdoing and the individual has no right to claim those benefits. Similarly, for a factory worker, it may be mutually understood that his duty includes taking care of the machine tools that he uses to work on regular basis. But, if he intentionally neglects that duty causing damage to the tools and, also, frequent stoppage of work due to this negligent act of his, then he is failing in his duty and has no moral right to be protected from punishment. The company, too, would do no moral wrong in punishing him. Now, consider that the worker approached the trade union for protection, and the union used its ‘political power’ to protect him from the organisation. This act of the union can be termed unfair and unethical as it may damage the discipline on the shop-floor or may also seem partial and unjust to other workers.

In other words, if individuals in an organisation enjoy certain rights, they are also bound by duty. Rights and duties (‘obligations to perform’) are, thus, reciprocal. Thus, for individual behaviour to be ethical, there should be a fair balance between rights and duties in an organisation.

Ethics in Business and Corporate Governance

In many organisations, it is not uncommon to find either the work environment and facilities or the work contracts unfairly favouring the management; such companies are often faced with the chronic problem of work stoppages or lower productivity. Organisation structure, balances in reciprocal rights and duties, reward and punishment policy, and transparency and uniformity of rules and regulations greatly influence both individual behaviour and ethics in a company. Figure 4.2 shows the relationship between individuals and the business, which is driven by the self-perceived interests of both parties but bound by ‘correlated duties and responsibilities’ to each other.

Interest of profitability

Interest of the self Interest of the group Interest of the society

Correlated duties & responsibilities


Interest of functional discipline & order Interest of growth and sustainability Business

Figure 4.2 Relationship between Individuals and the Business

Some common examples of unethical behaviour of individuals in a business organisation are: negligent and fraudulent practice, false or misleading reports and data, theft, discrimination and unfair practice, wrong communication and harmful campaign against others in the company, eliciting undue benefits or advantage by coercing others, etc. Such behaviour of the individuals concerned is unacceptable and unethical; employees at all levels are obliged (duty-bound) to the company to behave ethically as a part of their contracts and the relationships outlined by what is commonly called the ‘law of agency’4. Law of agency specifies the legal duties of employees (agent) towards their employers (principals) and prohibits the agent (employees) to act in conflicts of interests with those of the principal (employer). Here, employer means the company and not an individual who appoints a person on behalf of the company, and interest means interests of the company with respect to its goals and activities designed to achieve those goals and not personal interests. However, the law of agency appears to be silent about principal’s duty and responsibility. Hence, in India especially, the Industrial Disputes Act, 1947 and other labour laws have been enacted to protect trade union rights and the rights of individuals in employment. These laws are quite explicit about the duties and obligations of employees and employers as well. It would be unethical for the employers to punish or retrench or shut shop (i.e., closure of the factory or the company) without giving the employee concerned an opportunity to defend himself or herself or proper notice or compensation, just as it would be unethical for the employee to stop work, abstain from duties without notice or permission, wilfully damage tools or equipment, consume alcoholic drinks in the workplace, or indulge in violation of the standing rules of the 4, accessed on 10 October 2011; and agency, accessed on 10 October 2011

Ethics: Individuals and the Organisation

company, among other misconducts. Notwithstanding these regulations and obligations, there are plenty of instances in India wherein both parties in the contract of employment (employer and employees) violate ethical relationships or indulge in unfair and unethical practices (using respective power equations). A company is ethically bound to pay fair wages to its employees (including temporary workers), provide healthy and safe working conditions, allocate jobs as per individual skills and capability, and to not (knowingly) engage or exposing an employee to hazardous or high risks jobs. For example, engaging a mason in a high-risk job at the construction site of a high-rise building (as is prevalent in India) without insurance cover and adequate safety measures to prevent accidental fall from a height, is unethical—although the mason may have opted to do that job knowing fully well that such protection is not made available. Similarly, employing child labour in industrial jobs so as not to pay the full wages is unethical and illegal in most developed countries, including India, but this law is being violated either unethically or owing to places of power. Thus, in business, ethical behaviour and the obligations of individuals are mutual relationships based on the model of organisation, the law of the land, contractual duties and obligations, work environment, and codes of general ethics that are acceptable as moral and rational to general public. At times it has been observed that unethical behaviour of the management often leads to irrational behaviour of employees, which may be construed as unethical. Similarly, militant trade unionism also leads to the management acting irrationally and unethically. Just as the management has the right to freely associate with the others in the organisation and exercise its power to run the business, with a view to accomplish morally justified business goals, even the workers have the right to freely associate with each other and to form and run a ‘trade union’ to accomplish their morally legitimate interests. Going beyond morally legitimate interests could be unethical or may lead to unethical actions and responses in an organisation, which may then call for dispute resolution mechanism invoked either by the organisation or in the court of law. To make its ethics work, an organisation has to promote and protect morally legitimate interests of individuals; otherwise, the organisation will be riddled with conflicts of interests and a general lack of the sense of duties, direction and responsibility. Pursuing personal interests by taking advantage of power structures either of the management or the union is very common in Indian industries, and is a major source of violation of ethics in governance. An organisation’s work culture is, therefore, largely responsible for the overall ethical climate in the workplace, which ultimately influences the ethical behaviour of individuals. The ethical behaviour of individuals can also be influenced by the organisation’s (business) goals. It is not that business always has socially beneficial goals or non-harmful goals. A few examples of harmful goals are: manufacturing hazardous materials (e.g. asbestos), increasing pollutions for cost cutting and profits, manufacturing spurious drugs, etc. Ethicists claim that, in such cases, it is the duty of an employee not to cooperate with the organisation. Such an understanding of ‘goal-means and ethics’ by individuals and their correlated duties and responsibilities go a long way to ensure ethics and ethical standards in the organisation. Sometimes, goals are not clear and can be deceptive, and this can put individuals in a moral fix when it comes to performing their duty. Let us consider one such case of a closed industrial unit:

Ethics in Business and Corporate Governance

An industrial unit, in eastern India, had been closed for over three months, under the ‘Notice of Suspension of Work’5. A reputed brand-name in its line of work, the industry had been plagued by the mismanagement of its successive owners and was, ultimately, referred to BFIR (Board of Financial and Industrial Reconstruction). The then presiding management had taken over from the BIFR owing to the initiative of the government which was keen on the industry operating in its earlier glory and had made necessary financial arrangements for the same. The management ran the company for few months, but soon dispute started surfacing with the workers and their unions. The unions raised question about the management’s intention to increase production and, in doing so, to offer the workers a chance to earn more and with greater motivation and commitment. The management, citing poor demand for the company’s products, displayed its reluctance to increase production and took no action to improve product quality either. The factory continued to run in a half-hearted manner and, when questioned about it, the management cited lack of fresh capital to upgrade the unit. It then proposed to the government that the excess land around the mill be changed from ‘industrial’ to ‘commercial’ in order to facilitate the use of that land as commercial realty projects to raise extra capital for factory upgradation. Both, the union and the workers sensed mischief here—fearing that the owner would shut the factory to gradually convert all land into a more profitable realty business—and objected to that proposal. This led to further deterioration of the situation in the unit: many employees were laid off, production was cut further, followed by the management defaulting in PF (provident fund) payments in its employee accounts. Workers and the union started agitating in front of the factory gates, leading the management to declare ‘suspension of work’ till further notice—on the condition that no further talks or negotiations would be held unless the workers rejoined their duties. The management alleged misconduct of the workers, failure to report to duty as per schedule, and violation of service contracts. The workers, on the other hand, alleged management neglect in terms of running the unit, unfair treatment to employees, and hidden agenda to convert the factory land into more profitable realty projects. The government appealed to the workers to report to duty without further delay in order to save the unit, but the workers were undecided about this (duties to obey orders) as they doubted the management’s ultimate goal. Here, again, owing to the pressure from both the management and the power centres in the deal, the workers were divided! They were in a moral fix to judge about what was the right thing for them to do: to cooperate with the management or not.

Thus, duties and responsibilities are also dependent on the purpose, goals and means of business in an organisation where choices of the individuals could be guided by their moral understanding and moral reasoning. In this context, an organisation ought to be transparent and ethical in order to avoid conflicts in business and management processes. There may be no ideal solution to all the problems in business, but ethics and ethical approach to governance can certainly strike a balance for the best results. Educating individuals about the merits of ethics, making people in the organisation aware of their duties and responsibilities, installing a transparent process of decision-making and administration, and firmly and uniformly drawing the line that

5, accessed on 10 October 2011

Ethics: Individuals and the Organisation

separates morally legitimate rights and those that are unethical have been recommended by management experts to assure ethical duties and responsibility in the organisation.

4.3 ORGANISATION AND THE RESPONSIBILITY FOR ETHICS While ethical responsibility in business has been discussed in Chapter 3, the aim here is to identify how organisational nature (its character and culture) as well as behaviour influence individual ethics, and how to ensure proper ethical behaviour in the organisation. However, for ethics, there can be no ‘single point of responsibility’ in the functioning of a business; it is the joint and interdependent responsibility between the organisation and its employees. An organisation has the responsibility to draw the individuals into a culture of ethical behaviour by demonstrating its ethical character and ethical functioning, while the individuals in the organisation have the responsibility to obey the moral and contractual standards of behaviour and not to indulge in immoral, unfair and unjust activities. Let us understand this by exploring the subject further. An organisation, to run its business smoothly, requires the help of ethics—or absence of unethical behaviour and practice, as the case may be. But, people in all ranks are sometimes guided (or motivated) by their own (personal) interest first, giving rise to unethical practices and behaviour in the organisation. Presence of different formal and informal power groups and their influences make the situation even more difficult to ensure total ethics in business. Therefore, limiting the abuse of power and minimising ethical conflicts in organisations has been a critical concern of social scientists and business managers. An organisation consists of different layers of people and management with different responsibilities. If all its members follow the moral and contractual standards of behaviour in their dealings within and outside the company, then violation of ethics would be minimal. In view of this, companies formulate codes of conduct at work, service regulations, dispute resolution procedure, authority and responsibility chart, etc. to prevent and deal with any occurrence of unethical behaviour and practice. Yet, even adherence to these practices in organisations has been unable to stop unethical practices. So, what else can be done anew to improve the situation? Management experts talk about not only the presence of ‘code’, but also the actual display of ‘conduct’ with individuals of the top management ‘walking the talk’. They argue that ethics is a top down process, and commitment to ethics must start at the top. Like, for instance, installing systems of ethical governance and conduct—including monitoring and controlling—is the organisational responsibility of the board or trustees or the promoter. Most ethical conflicts in business originate from the lack of clarity in ethical governance and transparency in practice. If the top management is committed to ethics in governance, the rest of the systems and people fall in line with ethical practice—with a few exceptions, owing to the ‘effect of masses’ (there are bound to be a few bad individuals in the organisation). The organisation is responsible for ensuring that these few exceptions are not at the top from whom the company’s decisions and actions flow. Notable examples in this context could be Enron and Satyam, which have been discussed and referred many times already, where businesses had to be shut down due to unethical actions of the proprietor or the promoter.

Ethics in Business and Corporate Governance

Limiting the abuse of power (through political behaviour) and minimising ethical conflicts in the organisation is critical to good governance. Political behaviour in an organisation can be truly abusive and obstructive to ethical governance. In fact, there may be very few organisations that are totally pervaded by the culture of political behaviour; but, no organisation is totally free from it either. Therefore, the question is: In these organisations, are individuals and their interests treated as per their moral rights? Many a time, in such organisations, political tactics are used as means to achieve certain goals that favour a few individuals and work against the rightful interests of others. There could, indeed, be an argument about the overall ‘utility’ of these goals—from the point of view of their benefit to the business and society—but ‘the means’ of attaining these goals cannot be considered ethical if they are not rational and fair to all. Hence, such behaviour and flow of power is not good when it comes to creating a condition of ethical governance. Let us examine this case through voluntary retirement scheme6 (VRS) that was practised by organisations in India at one time. Until some years ago, VRS was a viable option during the downturn of a business, wherein many organisations sought to reduce its employee strength, through VRS—an option which had approval of the government and regulators. This scheme—though called ‘voluntary’— was not entirely voluntary in practice, and all such schemes were implemented with a target of retiring a certain number of employees within a time-frame. However, considering those workers who opted to retire received financial compensation based on the duration of their service, many businesses preferred to force ‘voluntary retirement’ on those in the organisation who had not been in service for too long. While many agreed that VRS was beneficial to those organisations that aimed at cutting costs and could even ultimately benefit all the employees in the long run, it was very hard on those who were being retired—especially if they were young, with family commitments (it would be difficult to find alternate employment in a bad market scenario). Also, given their small service period, the compensation amount would be far less and not enough to support another venture or foray. Hence, moralists in the organisation argued that the scheme should actually be offered to all on a voluntary basis and people should have a choice (whether the scheme would benefit each one in his or her own set of circumstances). Yet the organisation would not relent due to: (a) the numerical target of VRS which might not be met if left totally voluntary; (b) the high cash outflow if senior workers were to avail the scheme; and (c) loss of experienced hands from the organisation that might pose a problem when business would start looking up in the future. Hence, the management enforced the issue with the help of a few powerful individuals in the trade union, and there were an atmosphere of gloom in the organisation. Young employees who were forced to opt for VRS said that the organisation was unethical and lacked the virtue of care.

Thus, a scheme considered beneficial by the majority can be the cause for ethical disturbances in the organisation—if not implemented with care and concern for individuals—and can lead to low morale amongst employees. In such cases, better results may be obtained if the organisation is not led by ‘power to act’ but by the ‘virtue of the actions’. 6, accessed on 10 October 2011

Ethics: Individuals and the Organisation

Figure 4.3 shows the areas of concern for ethical practice for creating an organisation where results are obtained not by ‘power to act’ but by ‘virtue of the actions’. Ethical quality of leadership Ethical practice

Ethical standards of strategy and objectives Ethical human resource management Culture of ethics in inter-personal and inter-departmental transactions and interactions

Ethical practice

Ethics of product design Ethical process design & planning Ethics of marketing & consumer services Integration of ethics in entire process-chain of delivery

Ethical practice

Ethical responsibility for social and environmental well-being

Figure 4.3 Areas of Concern for Ethical Practice

Organisations are structured for the delegation of power and supervision of work, and are run by people with different attitudes, perceptions and value systems. Harmonising these elements of human characteristics in the organisation and directing and coordinating them for better goal-management are, therefore, a major concern of good leadership and ethical management practice. Like operational processes, the process for management of ethics and ethical standards in an organisation has to be built-in as a work culture, propagated by the managers who ‘lead by example’, maintained and audited for adherence, and emphasised as a basic requirements for all employees. Leaders and managers are responsible for creating an organisational environment and work culture that foster ethical practices that are to be followed by individual employees. Everybody in the organisation has to be attuned to ethical standards and practices; otherwise ensuring ethical behaviour of large number of employees in a big organisation would be difficult. Yet, the question remains: who is responsible for any violation of ethical standards—the organisation or the (concerned) employee? While this has already been answered, in general, in Chapters 1 and 2, the aim of discussing it here—from the point of view of an organisation’s nature, character and means of accomplishing goals—is to show that the organisation’s ‘path–means–and–goal’ have an important bearing upon the way its individuals behave. Often, activities in an organisation are collective (people work in or as a group) and it is, therefore, not easy to single out an individual responsible for an unethical act. In such cases, the organisation’s responsibility is to clearly identify the role, responsibility and resources required by any individual to match the organisation’s stated goals and ethical standards. However, where there is teamwork involved, identifying individual responsibility for unethical act (which at time may be unintentional) may be difficult. This has to be secured by clear identification of each individual’s role and responsibility of carrying out the assigned tasks within the ethical standards

Ethics in Business and Corporate Governance

of the company. If this responsibility and the consequences of fulfilling or not fulfilling it are clear in a team, individuals are likely to behave more conscientiously and ethically. Violations of ethical standards in a work-group are associated more with the way the organisation works and uses power than with the individual’s own choice. One of the purposes of establishing the ‘ethics policy’ and ‘ethics management mechanism’ in the organisation is to bring transparency in what it needs (ethical standards of behaviour) for its justifiable goals and what is ‘moral’ and ‘fair’ for its people. Despite such transparency, there could still be instances when certain individuals—or the organisation itself—may indulge in immoral or unethical acts. For this very reason, ethics management mechanisms provide the people of the organisation with the moral power—more commonly known as ‘whistle blowing’—to prevent such wrongdoings.The term ‘whistle blowing’ refers to attempts made by an individual or member of the company to alert or disclose about the wrongdoings in or by the organisation. Many believe that such a practice can give rise to more unethical acts than it can stop, because, in the guise of whistle blowing, people often take recourse to personal complaints (even on flimsy grounds) against those who they think pose a threat to their own interests. Hence, whistle blowing has to be practised with caution and discretion so as to harm—even unintentionally—neither the fairness of this practice nor the rights of others. Complaints and whistle blowing may not be valid or sufficient caution against unethical dealings, but such systems are necessary as a ‘psychological brake’ for unethical acts and deeds in the organisation. Anonymous letters about alleged wrongdoings of colleagues and superiors in business are some common examples of such use—or abuse—of whistle blowing. Notwithstanding an organisation’s stand on ethics (as discussed earlier), it is evident that an individual in the organisation cannot totally absolve himself or herself from the responsibility of an immoral and unethical act (either committed by the individual or known to have been committed by others in the organisation). An individual has the moral responsibility not to participate in any unethical and immoral act by choice or even by coercion. He or she is morally required to try to prevent or protest against such activities by using the organisation’s channel of communication. Failing this, he or she may also be held responsible for the damage, if the consequences are grave. For example, if the salesman of a pharmaceutical company learns about the spuriousness of a drug being marketed by his company, he should not knowingly participate in promoting it; this would be his moral duty towards protecting the unsuspecting consumers. If as a consequence of using such drugs, someone suffers serious side-effects, then the salesman could be held responsible for this immoral act along with his employer (the organisation). However, as stated earlier, his responsibility in the eyes of the law can be mitigated to the extent that he had been used merely as instrument and not as an individual—if that act was forced upon him by others in the company or its management. One may argue that a person’s responsibility—in unwillingly cooperating with others in a wrongdoing even if through minimal involvement—should not be taken as his or her failure to protect ethics or act ethically. Factors leading to the actual performance of the wrongdoing should be determined so as to mitigate the individual’s legal and moral responsibility. However, it should be kept in mind that an employee or professional (e.g., chemist, doctor, salesperson, software professional,

Ethics: Individuals and the Organisation

etc.) are morally duty-bound to prevent a wrongdoing, and cannot plead innocence on the grounds that their involvement was minimal or that they were used as mere instruments, especially when the wrongful act has serious consequences in the eyes of the law. In practice, more serious the effect of a corporate wrongdoing (e.g., adulteration of baby-food, sale of spurious drugs, extortion of money, etc.), lesser the consideration or weightage of factors like pressure, uncertainty, compulsion and minimal involvement as factors that could mitigate the responsibility of an individual. In terms of the responsibility to establish ethical norms and standards in an organisation, many social scientists observe that companies often tend to camouflage their purpose and aim as ethics in their programmes. The ethics programme of such organisations focus more on external obligations like CSR, environment compliance, corporate donations, etc., rather than on addressing their internal systems and procedures of governance. They often overlook the effect of their own internal mismanagement of ethics in terms of job discrimination, product and service quality, advertising, marketing, financial accounting, etc. They contest that business organisations have to aim at maximising profits, which automatically makes it mandatory that all internal systems are put into order as per the organisation’s goals and objectives. Therefore, the focus of their ethics policy and ethics management is more on external commitments than on their internal systems. Thus, ethics and ethical responsibility often take the shape of external social vision that many companies offer outwardly; but the ethics of delivering quality products, services, and customer care among other things affecting the internal operations of their business go unattended. However, the general view of ethics and ethical practice is to take responsibility for morally right services to all stakeholders—be it customers, employees, shareholders, government, society or the public at large—who are affected or influenced by the company’s business. In this chain of activities, people (employees) and processes (internal systems) of an organisation are an integral part of the whole system; part fulfilment of responsibility in one area cannot possibly fulfil the need in other areas. Hence, an organisation has the responsibility of designing ethical policy and programmes with a holistic view such that they serve and complement each part of the business organisation. Individuals, in turn, have the responsibility to follow and abide by the policy direction and programmes in their respective areas of work and responsibility. Some examples of organisational areas, where work related to ethics and ethical standards assumes importance, are: human resource management, fair wages, promotion policy, code of conduct in service, vendor and supplier development, investor care, customer services, product and marketing practices, pricing and advertising, accounting, pollution control and environment management, etc. It is the organisation’s responsibility to maintain ethics and follow ethical principles while carrying on its varied activities, such as: arriving at goals and objectives, processes and parameters, products and service packages for customers and investors respectively, and drafting policies and programmes in general. In the management of ethics, the critical denominators are transparency (in communication) and morality (of treatment to stakeholders). In matters of ethics, both the management and the employees have to work in resonance; the former has to set goals, facilitate and help, and the latter will obey and operate with commitment.

Ethics in Business and Corporate Governance

An organisation’s role and responsibility, when it comes to establishing ethical standards, can be best illustrated with reference to the practice Honeywell Inc of USA. According to an earlier report: Honeywell recognise that they cannot have a set of business practices for each of the 95 countries where they do business. They believe that only one formula works—ethical behaviour—all the time at all places. In doing business globally, Honeywell employees are required to comply with all applicable (US and foreign) laws and regulations. Compliance with such laws, as well as company’s ethical standards, is required even if that would place the company at a competitive disadvantage. At Honeywell, every employee is made to read the Code, as well as discuss, understand and apply it. Every leader is expected to help his or her team understand and follow the code. He or she also must provide ethical leadership by personal example and set the standard for ethical performance, helping employees when they have ethical questions on the job. If an employee for some reason cannot get help from management, Ethics Officer is available for counsel to anyone, anywhere at Honeywell. Employees of Honeywell recognise integrity as their number one of core values, which serve as the framework for decisionmaking by employees worldwide. To maintain company-wide integrity, each employee is held accountable for understanding and practicing the Code of Ethics and Business Conduct, which helps them make decisions about: doing business with customers, suppliers, and the government; competitors; employee responsibilities; international issues; media relationships; environmental, health, safety and quality issues; and taking action on ethical concerns. They translated their Code into six languages and distributed it worldwide, so that wherever an employee works in the world of Honeywell, one common set of business principles is understood and practiced by all. Honeywell also have a ‘Honeywell Ethics Hotline’ that employees can call anonymously with questions or concerns about ethics policies, or to report suspected violations of the Code without fear of retribution.”7

4.4 ETHICAL ISSUES IN HUMAN RESOURCE MANAGEMENT In today’s business environment, employees are the most valuable part of resources required for doing good business. Their attitude, their ethics and their motivation impact business processes and performances in most significant ways. The ethics governing human resource management (HRM) in an organisation have two main facets: (a) the way an organisation treat its people, that is employees, and (b) the way the employees behave in the organisation and treat its customers, suppliers and other stakeholders of business. However, ethical issues related to these two facets of the human resource management function cannot be separated from each other. In this chapter, an attempt will be made to highlight the ethical issues concerned with how an organisation treats its employees with regard to rights, duties, fairness, justice, transparency, equality and care. The ethical imperatives of the profession of human resource management—where both HRM professionals (employees) and organisational policies and directives are involved—will be discussed in Chapter 6, ‘Professional Ethics’. Common ethical issues concerning employees in the context of human resource management may arise from: 7, accessed on 29 December 2011.

Ethics: Individuals and the Organisation

• Nature of employment contract offered to employees • Nature of work conditions and environment with respect to employee safety and health care • Discrimination in jobs due to supervisor’s action and preference • Lack of equal opportunity, that is discrimination due to race, gender, colour and creed • Remuneration criteria and discrimination • Ethics of hiring—temporary and permanent hands • Ethics of retrenchment and layoffs • Performance appraisal and performance measurement The human resource is considered the engine of an organisation. Hence, in a competitive business environment, most organisations try to take care of their employees in a fair and equitable manner to make them happy and motivated. If what is stated is the real situation, there will not be many ethical problems regarding human resource management. But the situation at the ground level is rather contrary. The ethical issues relating to human resource management are plenty. Issues arise because human beings are very sensitive to their surroundings and environment and highly concerned about their rights or deprivation and fairness or partiality of treatment. Apart from human sensitivity, an organisation’s HR or personnel management policies may also give rise to ethical issues. Among such HR policies are: 100 per cent hiring of managerial hands from outside and cadre-based promotion (e.g., cadre based on the management trainee scheme and cadre based on non-management trainee scheme). Implementation of these policies may make one or the other group of employees feel deprived of equal opportunities. However, ethics are not to satisfy all; their purpose is to ensure fairness of deals and justice. Management experts believe that the attitude of a business towards its employees acts as ‘litmus test’ for its ethical character. It is expected of an organisation to follow clearly laid down transparent and ethical selection and hiring policies. By and large, the relationship between an organisation and its employees is based on the employment contract offered on selection. Therefore, the employment contract should clearly state not only the terms of employment and emoluments but also the reasons such as misconduct, inefficiency and the company facing an emergency situation that will terminate the contract as well as the employee’s entitlement of separation compensation, if any. However, while the contract terms are legally binding, ethics are not enforceable by someone outside the organisation. Therefore, often organisations are seen to be covering the ‘minimum legal requirements’ of an employment contract, keeping flexibility for themselves and leaving many grey ethical areas for their employees. For example, the manner of deciding the variable pay component of emoluments may not be clear or transparent. Or, the entitlement to facilities and other perks could be left unclear. An ethical organisation has to demonstrate through selfregulated actions that it is fair to all, just to the aggrieved, and equitable in practice.‘Equitable’ does not necessarily mean ‘equal to all’; it implies one’s entitlement to gains and rewards according

Ethics in Business and Corporate Governance

to one’s share of contribution, quality, ability and responsibility. As gains and rewards should be equitable, punishment and deprivation of benefit should also be equitable. Remuneration and perks constitute another ethical issue in HRM. An organisation should follow the rule of fairness and equity in deciding the remuneration and perks of its employees if it wants to to be judged ethical. None should be discriminated with regard to remuneration and perks for which he or she meets the eligibility criteria as per the company’s policy of compensation packages for employees. However, this does not give someone the right to claim remuneration equal to a person of higher capability, performance, and experience. The ethics of fairness demand that the company’s compensation policy should be open, transparent and equitable so that people know what they can benefit from, where and how. An ethical remuneration policy may allow special rewards for to those who have contributed to the company’s long-term goals by hard work or by meritorious achievements. Such provisions should be transparent and made known to employees, and should not be left at the discretion of the management. Any unfair action in this regard will spread discontent and disenchantment in the organisation and may even demoralise employees. Ethical acts by the organisation to treat its employees fairly and equitably as per their terms of employment, skills, ability, contribution and special achievement provide the much-needed ‘safety-net’ for employee retention. More than any other administrative measures, ethics in HRM help motivate employees and create positive work culture in the organisation. From the social well-being point of view, ethics make organisations to offer equal opportunity in employment and career progression.Though the ethical issue of equal opportunity in employment arose from social considerations, it has now proved to be a very good means of serving the organisation’s need for high-calibre talent pool. Examples of many women chief executives steering various national and multinational companies today are a testimony of this fact. Avoidance of discrimination in hiring on the basis of race, gender, colour or creed has proved extremely beneficial for globalisation of business and availability of highly creative talents of different races and creeds globally. Encouraged by the benefits accruing from a workforce raised by following the ethic of equal opportunity, many companies put up the note of “equal opportunity employer” in their recruitment drives. Discrimination can be in job allotment too due to a supervisor’s preferences and prejudices. For example, a person can be insisted upon to work in night shift day after day out of turn without any justifiable emergency. This is unethical, as it denies equal opportunity to the person concerned. The cause for such discriminatory action is often rooted in the prejudices or preferences of the supervisor or the administrator. This is widely acknowledged as an important ethical issue in many small and medium organisations that are run by non-professional managers. Any discrimination divides the people (employees), weakens the organisation’s cohesiveness and team spirit, and may even lead to disruption of work—all this happens due to the organisation’s failure to uphold ethical standards. For good work output, we need good working conditions and environment. Working conditions should be safe to work, free from health hazards and hygienic, and should delight the employees. It is the ethical responsibility of the organisation to provide good and safe working conditions

Ethics: Individuals and the Organisation

so that its employees are not put to any risk of accident or health problem. This ethical issue is largely prevalent in the unorganised sector and also in many small and medium manufacturing companies. Though there are some legal remedies for any accident at workplace, ethics relating to working conditions are aimed at preventing such happenings and the resultant misery of the affected employee. Employees get more deeply hurt due to the ethical issue of retrenchment and layoffs than any other ethical issue. Apart from creating financial worries, the retrenchment and layoff issue may also create psychological and social problems for the concerned employee. Retrenchment deeply impacts the employee morale. Therefore, the organisation has the ethical duty of minimising the adverse effects of retrenchment if it cannot be avoided. Retrenchment, layoffs and voluntary retirement might be an organisational necessity at times, but the ethical challenge for the employer in such cases is to ‘sweeten the bitter pill’ to lessen the harm to the concerned employee, especially psychologically and socially. However, this ethical issue might not arise if an employee is retrenched for some criminal offence. Retrenchment or termination may be applied to two categories of employees—one temporary and the other permanent. Ethics of dealing with employees and employee-related issues apply to both categories.The difference between the two is that the temporary staff is psychologically prepared to leave as per terms of their recruitment, but permanent employees expect to work for long under the guidance, care and training from the employer. The organisation has the responsibility to make adequate efforts to train, guide and develop a permanent employee, failing which the question of retrenchment arises. The organisation is not legally bound but ethically expected to train and develop employees into permanent workforce. Hiring temporary staff for a non-permanent job is legally permissible and does not conflict with the ethics of hiring. But, questions are raised when the organisation tries to get permanent jobs done by hiring temporary people, which is tantamount to depriving the concerned permanent employees of some benefits. This is where the ethics of rights, duties and fairness come into play. Here the question raised is: Can the organisation hire temporary hands when the jobs to be performed are perennial and permanent in nature? The ethical answer is obviously no because in this case hiring temporary staff is not only unfair but also discriminatory and prejudicial to legal provisions. The prevailing high unemployment in India might help the organisation get the desired temporary staff, and its action can even escape the legal eye, but ethically it is not correct. It is only exploitation of an unfortunate situation. And, exploitation in a society or organisation is neither fair nor right. Finally, let us focus on the issue of performance appraisal in the organisation, which is used to reward or punish the employees. Performance appraisal is often a cause of heart burning among the employees because of its non-transparent nature and adoption of improper evaluation modes. It is prone to biased performance evaluation that may not fairly assess one’s performance in the relevant context. Many employees think the evaluation process is faulty and unfair to them. Actually, the balance of the process heavily tilts towards the management’s advantage. It is quite possible that the management may deliberately scale down an employee’s performance to

Ethics in Business and Corporate Governance

deprive him/her of some benefits or punish him/her.The ethical issues directly related to performance appraisal are ‘fairness’ and ‘right to defend’. There is also an important indirect issue concerning appraisal: Does the management ‘take care’ to monitor, train and counsel the employees to enable them overcome their shortcomings and enhance their performance? Organisations have the right to recruit anyone into their employment, but they also have the responsibility of caring the employees once they join them. Employee caring means concern for the employee well-being, which would reflect in the organisation’s efforts to counsel, train and develop an employee for better performance. In the absence of organisational caring, the year-end performance appraisal cannot be a proper measure of an employee’s performance because he/she was not given an opportunity to improve and contribute to the organisation’s overall performance. In other words, the employee was deprived of ‘equal opportunity’ to excel. It is generally observed in organisations chances of ethics violation are more in the case of ‘white-collared’ jobs than the ‘blue-collared’ ones. This is because the blue-collared jobs (primarily shop-floor jobs) mostly fall in the organised domain of trade unions, which symbolise the collective ‘bargaining rights’ and employee protection from ‘injustice’.Though trade unions are also not truly free from unethical activities, they are seen as the guardians of the rights of their members, that is, blue-collared employees. The white-collared employees are mostly part of the service sector of an industry and are often left out of the scope of trade unions. They do not enjoy the collective bargaining rights or protection from injustice, if any, by trade unions. Hence, they are the weakest link in the management of ethics in the organisation. Therefore, violation of ethics in case of white-collar employees is not that uncommon. Today, the human resource management function of organisations is often seen going out of the way to attract best talents from the market by offering lucrative terms of appointment. At times, the HRM ignores ‘home-grown’ managers and employees for better openings in the organisation, thus denying them a fair chance to prove their hard-earned skills and capability. This action also often poses the problem of the ‘cultural mix or integration’ due to cultural differences. Differential treatment given to the new recruits and the conflicts in work culture often precipitates ethical issues like unfairness and discrimination. As the new recruits mostly fill the openings at senior levels, it is necessary for the organisation to exercise caution to ensure the cultural integration and harmony in the team of managers. Transparency in recruitment, open discussions about necessity, assurance of fair play to existing employees while filling competitive openings, and commitment to further development of meritorious managers are few of the steps that can mitigate such conflicting situations. In today’s business environment, ethics should be a strategic measure to optimise the ‘internal strength’ of an organisation by reinforcing the motivation and skills of employees on the one hand, and maximising ‘external gains’ by building a ‘brand image’ that epitomises ‘good ethical standards’ on the other. In this regard, consider the example of the Tata Group of companies, which are known and well recognised across the industries for their harmonious and ethical management of human resources. It is widely accepted that one of the pillars of the Tata brand is its ethical standards

Ethics: Individuals and the Organisation

of human resource management. The desired focus on people management and employee development for career growth is the hallmark of the Tatas. Therefore, the employee turnover in Tata organisations is much lower than the national average. Following good ethical standards in human resource management are, thus, a strategic advantage—not only for developing the quality of workforce but also for the continuity of the desired management culture and for avoiding the high cost of employee attrition.

4.5 CASES OF ETHICS VIOLATION AND RESPONSIBILITY The problem of ethics in a business-place, be it individuals or the management, are so widely dispersed that every organisation is faced with many such issues everyday. It may start with something as simple as a worker reporting late for duty with the indulgence of his supervisor and go on to something as serious as manipulation of accounts or dividend stripping by the board or owner in a way that harms the investing public. Consequences of such unethical acts also vary to a very great extent, ranging from affecting the morale of fellow-workers to affecting the pockets of investing public, not to mention the brand image. Whatever be the case, this attitude (of permitting any unethical practice inside the organisation) is contagious and, hence, must be nipped in the bud.Yet, completely eliminating unethical acts would be virtually impossible, because it is not the company’s system and policy of work that really matter in this regard, but the attitude, education, culture and value system of people at all levels that is important to maintain ethics in the organisation. Educating people at all levels in a business-place would be a big stride forward in ethics management. If the top management is open to listening, sympathetic to some causes of failure, keen to resolve employee and customer issues with transparency, sincere to promote teamwork, careful of not indulging the power of politics, and lead by example, then a culture of ethics and honesty is created in the organisation. And, it is in such a work-climate and culture that most people learn to be ethical in dealings and acts.This is why ethics is said to be a cultural part of the organisation; ethics should flow from the top, and be deployed not by actions but by transformation, i.e., transformation of attitude for a culture of being fair and moral. Examining, across this chapter, cases of ethical and moral violation in an organisation may help clarify the issues better.

A worker’s leave application for his daughter’s marriage, which was organised out of town, was rejected. The manager’s refused on the grounds that work would suffer in his absence for two weeks, and, instead, granted the worker only a week’s paid leave. At the end of the sanctioned period of leave (i.e. a week), from the venue of his daughter’s marriage, the worker sent a ‘medical certificate’ to the manager stating that he had been taken ill and was advised a week’s rest. On his return to the workplace exactly after two weeks, the manager did not allow him to rejoin duty immediately. The worker produced his medical certificate, to

Ethics in Business and Corporate Governance

explain the delay and continuation of leave, but the manager refused to accept the certificate and called it false. Instead, he issued a show-cause notice to the worker for failing to join his duty on time. Once the notice was served, the worker took shelter under the workers’ union, which in turn invoked the politics of power rule to settle the issue in the organisation. Union officials charged the manager as being inconsiderate and partial, and demanded withdrawal of the show-cause notice. According to the union, the manager had been ineffective in handling the shop-floor situation with a proper contingency plan, thus, allowing production to suffer—affecting the interests of all workers (in terms of earning production-bonus). The matter was taken up with the top management (hierarchy) of the organisation; and finally, the union got its way in view of limiting further damage.The worker was taken back to duty with retrospective effect and pay. Note:This case is illustrated from the author’s (industry) experiences and may not bear exact similarity to other people, places or practices. Although common in an organisation, such a situation is needless and contrary to the culture of ethics. Ethically, the manager should have displayed ‘ethics of care’ in granting two weeks’ leave to the worker, which is not too long a period. Managers do have the responsibility of keeping a second or contingency plan ready for such occasional demands—considering a worker can fall sick or meet with any accident or need emergency help. On the other hand, the worker was morally wrong in extending his leave on a false pretext (medical certificate), if that was the case—yet, the manager could not reject the medical certificate outright, without further referring to the opinion of another doctor or perhaps the organisation’s in-house medical officer. The union was duty-bound to protect its member(s)—presuming that the medical certificate was genuine unless proven otherwise. The consequent power play game in the organisation further vitiated the ethical work culture. Thus, a simple case—that could have been handled better using ‘ethics of care’—became a point of conflict and power-play between the union and the management. Ethics provide that one should be fair in ones dealings, act in sync with the company’s interests, and respect values (like honesty and integrity). There should be an environment of mutual respect and care in the organisation. However, the following questions arise: (1) In the first place, was the manager fair in not granting two weeks’ leave for an important social occasion like a daughter’s marriage?; (2) Did the company practice a ‘leave plan’ scheme for workers where an individual can indicate and inform about his plan to go on a long leave?; (3) Was the doctor morally right in issuing a supposedly false certificate?; (4) Was the manager right to issue a show-cause notice rather than listening to the worker about his real problem?; and (5) Was it not the manager’s responsibility to arrange for an alternative work arrangement on his shop floor if a worker genuinely requires leave for a special reason or due to sickness? In fact, there can be numerous inquiries about this case in order to determine who is or are responsible for the situation. Had the company run a ‘leave plan’ scheme for each employee and conveyed to each the need to adhere to the leave schedule as planned, for the sake of its

Ethics: Individuals and the Organisation

own interests, then the said worker would perhaps not have asked for long leave, or would have managed with a week’s leave, or might even have rescheduled the marriage date or venue to suit his leave plan. If so, then who is responsible for failing to provide an alternative and allowing the company’s work to suffer? Is it more important to manage a workplace as per the company’s ‘rule by books’; or should the company give preference to promoting a good work environment of trust, care and cooperation and, thereby, employee motivation? Notwithstanding all such questions, one action leads to the other in the chain of events, just as more ethical and moral questions arise: If the manager was ‘caring’ and sympathetic to the cause of the worker and keen to resolve the issue and its effects before the roll-out of consequential actions, the company would not have suffered from this conflict at all. A worker has the right to take leave, but with the permission of the supervisor.The manager has the right to issue a show-cause notice for a wrongdoing, but after understanding the situation and the cause. It is also the manager’s responsibility to be rational and caring; he cannot over-react to a situation and refuse to accept the worker’s medical certificate without a valid reason. Medical practitioners are supposed to act as per the ethics of their profession, and any authority cannot overrule a doctor’s certificate without investigating further or by presuming that he has acted against his ethics. In the eyes of the law, the medical certificate is to be considered a statement of fact unless there is proof to the contrary. And if, in such a case, help is sought from the trade union, then it is the latter’s duty to defend its members based on evidence (here, the worker’s medical certificate). Lawfully, perhaps no one can be unequivocally blamed in this case, although it appears as if the employee violated moral standards with the help of a doctor. Yet, one may argue that the violation was forced upon him by the uncaring attitude of the manager. The primary responsibility of this conflict may, therefore, rest with the manager who could have been rational and caring in his approach from the beginning. Thus, ethical and moral practices in business cannot be by the rule-book alone, they have to be brought about by the morally guided involvement of those very people who are behind the process of creating an ethical environment in the organisation. Employees should be trained, educated and changed to effectively handle a situation before any damage is done.Thus, the organisation is responsible for introducing systems and promoting ethics in all business dealings so as to prevent unnecessary conflicts of interest and allowing scope for the politics of power plays which ultimately hurt everybody’s interests. Blaming one another is not the purpose of ethics management, but preventing and eradicating unethical behaviour in the organisation is. A focus on highlighting responsibility for ethics should begin here.

As per an Economic Times bureau report titled, ‘Insurers will cover you with whistle-blower policies’8, Mr. Malhotra (name changed), a finance executive with an MNC operating in India, lost his job for refusing to reimburse a sheaf of false bills forwarded by his managing 8, accessed on 10 October 2011

Ethics in Business and Corporate Governance

director. He could not muster enough courage to draw the attention of the company’s board, because he knew it could lead to a protracted legal tussle and he didn’t have the resources to sustain a legal battle with its erstwhile employer. The article then goes on to mention the multitudes of such unsung-heroes-turned-victims who remain disillusioned. A top insurance executive adds, “People seldom come to the rescue of an employee who blows the whistle. If anything, he attracts retaliatory action from the management by way of law suits” observed a top insurance executive who were planning to come out with an insurance scheme of ‘whistle-blower insurance’ to help such victims of falsehood. This is a classic case of a situation in which, if the management intends to cheat, no tightening of rules or introduction of a system can correct it. The responsibility to stop wrongdoings in an organisation, therefore, rests with its management and its willingness to hold on to ethical standards at any cost. If ethics have to play their role in the organisation, then individuals must have trust and faith in the management’s intention and commitment to ethics. Quite like the incidence of ‘whistle-blowing’ in the earlier example (which did not work because the employees feared the management’s retaliatory action), the system would be a toothless, ineffective tool if not supported by actions and commitment. Examining this situation in the context of the Satyam scam in India, would make it clearer why some senior employees and even independent directors apparently fail to stop the ongoing wrongdoings in the company and for so long. The major responsibility for the success of a system to check and prevent wrongdoing rests with the management’s commitment to ethics and in the manifestation of the same uniform action across the organisation. The top management is responsible for creating a culture of ethics and honesty, and to lead by example for others to follow. While many Indian companies now have the whistle-blowing system in place to check corporate wrongdoings, few are truly effective. However, with professional bodies (like chartered accountants, and other regulators of busines) becoming increasing aware of their (legal and other) responsibility, media penetration and social reactions, unethical actions of such unscrupulous individuals at various levels of the organisations appear to be on the decline.

India’s apparel industry employs females and children (below 14 years of age) for cheap labour to stitch and prepare garments9. These workers—including the so-called Zara-workers of India—are generally paid wages lower than what is stipulated; their workplaces are congested and unhygienic. The primary purpose of such centres is not to provide employment but to exploit sources of cheap labour. Ironically, most of these industries supply readymade garments to MNCs with branded stores across the globe—even if child labour is banned in their home countries (where they are headquartered). The respective governments of these 9, accessed on 10 October 2011; asro/newdelhi/ipec/download/southasia.pdf, accessed on 10 October 2011

Ethics: Individuals and the Organisation

MNCs prohibit the import and purchase of goods from manufacturers who employ child labour.Yet, this practice is rampant in most developing countries like India, Bangladesh, Sri Lanka, Pakistan and many African and Latin American countries, wherefrom high-waged developed countries (like USA, Canada, Britain and the EU countries) are increasingly outsourcing for cost-effectiveness. The giant corporations which buy this cheap material take no measure to check the widespread use of child labour in these industries; they seem more interested in maximising profits rather than in complying with laws and ethics. Not surprisingly, this practice continues unchallenged with perhaps an occasional furore created by the media. The questions pertaining to such rampant unethical behaviour are: (1) Is the use of underpaid and child labour (which is illegal in many countries) ethical in gaining economic advantage?; (2) Should the corporate ethics policy remain silent about such unfair practices and continue to enjoy the economic benefits thus reaped?; (3) Is it ethical that parents allow their children to work as industry labour—knowing fully well that it is illegal and that they are being exploited?; and (4) To what extent are the children, themselves, responsible for violating the law in being thus employed? These issues address the very root of many evils in this economy-oriented materialistic world.To begin with, social scientists would say that only legal prohibition of child labour is not the solution, some of the necessary prerequisites to eliminate this evil can be listed as: overall economic development that reaches the weaker sections of society, proper schools and other facilities for children, awareness (campaign) about child labour, and incentives to parents who send their children to school. While some others believe that these MNCs should stop buying from such centres in order to discourage unethical practices like child labour, the general public and a few parents may argue that there is nothing wrong if their otherwise unoccupied children work in such centres to earn a few economic benefits for their families. However, will the children not learn about the value of labour and, perhaps, even the joy of earning? Each one will have his or her say in the matter. The government officials say that it is illegal for children to work for wages; that they should instead go to schools (where education is free); and that parents are responsible to comply with these regulations. An NGO working in the area of child development may say that banning child labour, facilitating schooling, and motivating parents and children (with regard to the benefits of education) can make them more self-reliant and better off in life.Yet another group may say that the root cause of this evil practice is socioeconomic inequality in society and what matters to these people is the struggle for existence (and not adherence to ethics and laws). Therefore, it is the responsibility of the governments to deal with this inequality and make the society, at large, aware that children must go to schools for education and better health—this alone can bring ultimate economic benefits to a society. Yet, the real responsibility and solution for such social evils remains elusive.

Ethics in Business and Corporate Governance

‘Earth provides enough to satisfy every man’s need, but not everyman’s greed’, Mahatma Gandhi had said. Perhaps working with this realisation and philosophy can, at least partly, address the root cause of this problem. It is the combined greed of organisations (MNCs dealing in apparel industry products), the greed of owners (manufacturing centres), and the greed of parents (of child workers)—to earn more at the cost of health and education of children—that is at the root of this evil. Their greed breeds unethical practices and harms the society in more ways than what they get or give back to the society. Government laws and regulations can ban the engagement of child labour, but cannot stop the practice unless the perpetuators of this evil regulate themselves. Surely governments cannot stop at enacting the laws; they must also consider it their fair, sovereign and moral responsibility to ‘open the gates for alternative development and engagement’. The issue strikes deep into the way we do business for economic advantages and make profits by overruling the dictates of ethics and morality.The responsibility for such ethical failures, therefore, rests not only with all organisations (which overlook such evils) but also with the outsourced parties involved in this chain of business. Understandably, the fault of the children and their parents stands mitigated by circumstances and the country’s socio-economic environment. It may seem too little and too late, but recent reports indicate that—in response to social and governmental pressure—some MNCs are taking action against the practice of child labour engaged in the manufacture of their products. In short, if organisations do not have the moral will to go beyond the profit motive, then such wrongdoings cannot be eradicated from society.

Professional and individual ethics involved in India’s health care business and services often face severe criticism. Newspapers of eastern India (especially The Telegraph, and The Times of India, Kolkata) frequently report of medical negligence and consequent death or disability of patients, owing to the poor state of health care services in the region. Furthermore, the media often refers to cases of medical negligence; unethical treatment; prescription of unnecessary drugs and diagnostic tests; and authorities (of private hospitals and nursing homes as well as government run health centres) aligning with chemists and pharmaceutical companies for unscrupulous gains. Health care centres and nursing homes allegedly charge more than the package-deal negotiated for the treatment, and harass patients and their relatives by taking advantage of their helpless situations. When it comes to the economically weaker sections, cases of medical negligence and harassment of patients are even more frequently reported, as are incidents of patients and their relatives vandalising hospitals and nursing homes, and assaulting attending doctors. In turn, as retaliatory action, doctors go on mass leave or strike, altogether depriving them of the services of that hospital/nursing home. However, actions and counteractions rarely resolve the problem; and recourse to consumer grievance cells and other forms of legal justice only reduces it to an extent. Ethics of public behaviour, professional ethics and the teachings of medical jurisprudence are thus violated with a vengeance and without any check or correction. Social scientists desperately ask as

Ethics: Individuals and the Organisation

to who is responsible for mending this situation: the people who go to health care centres for treatment, the owners of hospitals and health care centres, the doctors and service staff attached to these units, the chemists and diagnostic centres who are known to be influencing such unethical practices, or the government? Note: This case narrates the author’s impressions based on media reports of medical negligence (especially in isolated parts of East India), and does not represent the health care scenario across India. Nonetheless, the case aptly describes the nexus between various sections of a business (health care services), and the unfair and immoral behaviour of a few individuals therein, which cause misery to many. It would, however, be wrong to conclude that most doctors and medical professionals are involved in unethical practice; in fact, over 80 per cent of such professionals abide by the ethics of their profession, and only 20 per cent or less follow unethical practices that lead to complaints related to health and society. Similarly, most patients and their relatives do not resort to vandalism when aggrieved; only a few display such aggression. Hence, like most other ills in the society, the problem of negligent medical treatment is also caused by a ‘few’ who do ‘vital’ damage to the civil structure of the society. Certainly, aggrieved patients cannot take the law into their hands and nor can they retaliate to health care professionals with acts of vandalism or harassment. Why, then, do they behave this way in an otherwise lawful and peaceful society? Here, again, what is brought to light is how individuals who are forced or denied their moral and rightful treatment take recourse to power and politics—and remain morally and ethically responsible for misbehaviour and damage. The doctors may excuses themselves on the grounds of work pressure, hectic schedules, patient overload, lack of facilities, etc.; nonetheless, they are responsible for negligence in treating patient that might have led to suffering, disability or death. A doctor can refuse treatment under pressure, but if and when they do treat a patient it must be to the best of his or her abilities and as per the medical code of conduct and ethics. This stand, however, does not absolve any doctor from the responsibility of treating an accident victim or a patient in emergency circumstances. In other words, such a refusal by a doctor would be considered highly immoral and unethical. And, while it is common in medical practice for an attending doctor to refer his patient to another specialist (if necessary), this should only be done after preliminary life-saving or emergency treatment (if required) is given to that patient. Keeping a patient waiting too long for treatment, or hampering urgent patient discharge to another hospital or specialist is unethical and unacceptable as per the medical code of conduct. Medical professionals are morally and ethically bound to treat patients especially when that is necessary to save life. Furthermore, as per rules of their profession, while the doctor can charge fees for any service or treatment provided, it is unethical to claim payment for any false or unnecessary services. Each of us has the right to choose one’s profession or work, but not the right to cause injury or unnecessary suffering to others (even if by negligence). Doctors and health care centres do not have the moral right to join hands with each other or with chemists or other suppliers to exploit a patient or situation (like providing emergency medical service or treatment). Such

Ethics in Business and Corporate Governance

covert or overt actions of doctors or health care units are immoral and unethical, and the doctor or the unit involved would be held responsible for the respective action. As in the earlier case, the greed for easy money by unethical means is the root cause of such social ills and violation of medical ethics. Negative media exposure, social condemnation and exemplary punishment and penalty by legal and consumer interest protection agencies or authorities can deter such practices. The role of the government to provide fair, easy and adequate medical services to all, especially the weaker section of people, can go to a long way in minimising this health care problem; ultimately, the government and administration are responsible for building adequate infrastructure and efficient health care facilities for all. Any shortfall in this basic right of citizens is most likely to aggravate both medical and social ills, and, under such circumstances, the government as well as the officials entrusted with the job of providing medical facilities remain responsible for the resulting moral and ethical chaos. Discussions thus far drive home the point that, while an individual remains responsible for his or her (role in) actions that violate ethics, equally responsible are the companies, establishments and governments whose acts cannot be morally justified and are ethically incorrect, or which create the cause for violation of ethics. Some of the reasons that lead to unethical behaviour of individuals are: unfair rules and regulations, discriminatory attitude and actions of a few powerful individuals, politics of power in business and society, shortage of critical resources and facilities, greed as motive in governance and management, and absence of serious punishment and penalty for violation of ethics. The theft of personal data in a BPO company in India’s IT industry is a case in point that absence of stricter laws and moral training of individuals can create problems. Thereafter, India’s BPO service providers drew a lot of criticism from across the world about the ability and quality of their services, considering that data compiled by credit agencies or banks is to be kept strictly confidential owing to the high risk of misuse and potential damage to clients. It has been found that while BPOs are responsible for storage and management of such data, it is their employees who are involved in serious data-related frauds. These thefts constitute violations of right to the privacy of individuals who, in the case of BPOs, are mostly residents of other (economically developed) countries. In India, most perpetrators of this crime go unpunished—or, perhaps, they may lose their jobs when their wrongdoings are detected. This is of course not enough nor an effective deterrent for such crimes. Therefore, BPO companies are now looking for a watertight system to protect the data and information of their clients—an issue that has become very sensitive when it comes to the industry’s future business prospects. Yet, many feel that watertight systems and stricter laws may help minimise the crime, but more effective means would be adherence to stricter ethical codes in workplaces, compulsory ethics training, and monitoring of individual conduct. It has been proven time and again that where greed guides the actions of individuals, system implementation can do very little to prevent wrongdoing—unless the individuals involved were to undergo some internal changes. Hence, perhaps, the solution lies in shaping moral values and moral standards of individuals in the society, and transforming them to individuals of high moral standards. Many ethicists claim that ethics-and-individuals issue is not the same as ‘chicken-and-egg’; for ethics, it is the chicken-first situation, because ethics have to nurture, bear and breed morally healthy individuals who would abide by ethics and morality. The task

Ethics: Individuals and the Organisation

of the society and business—which is an integral part of modern society — is to create an environment and value system that promotes better individuals and an ethical work culture in the first place. Unfortunately, today’s materialistic society, in its urge to prosper faster than ever, is failing to address this issue—and this is evident in the increasing number of unethical acts across all spheres of work and life, be it in society or in business.

Summary 1. The chapter outlines the nature of an organisation, how it works and how its work culture influences the ethical behaviour of its individuals. In the course of discussions, rights and obligations of individuals have been reiterated within the framework of ethical responsibility. 2. The chapter attempts to establish the specific role and responsibility of an organisation with regard to the ethical behaviour of its individuals, and illustrates the same through case analyses. Furthermore, the role and responsibility of individuals have been discussed with special reference to the internal nature of the organisation and its work culture—because individuals play a very pre-eminent role in the ethical conduct of business, whereby interests of its stakeholders and the society at large are maintained and sustained. 3. It has been emphasised that the understanding of how organisations generally work must be appreciated so as to understand the behaviour of its individuals. An organisation can be rational, political or caring or a combination of these. In rational organisations, activities of a number of people are coordinated with a view to accomplish a common, explicit purpose or goal through division of labour and function, and through a specific hierarchy of authority and responsibility. Although almost ideal, this goal-directed and structured organisation of business seldom exists in its true spirit in practice. 4. Organisations are often embroiled in different types of controversies involving their administration (management), and the means and goals of the business. Therefore, companies may focus less on rational aspects and more on political features. The chapter also elaborates the effect of the same. 5. An organisation’s work culture—rational vis-à-vis political model—has been pointed out. Political organisations do not have a purely rational approach, and do not accept that the rationality—designed to achieve goals and objectives—is sacrosanct in running the business. A political model views the organisation as a system of competing power and formal and informal lines of communication for coalitions to reach to pre-set goals—giving rise to the scope for more wrongdoings and irrational behaviour, as compared to a rational model. 6. More commonly, a mixed model of organisation exists within a company and the dominant group or mode rules the ethical nature of that company. In a rational organisation, people down the structures are driven to achieve the goal by a duty-responsibility-accountability relationship. In a political organisation, individuals form groups and coalitions with a view to bargain and compete with other groups for more power, resources, benefits, etc. 7. In a caring model, employers may grow closer to their employees and seek ways to serve and care for whom they exist (i.e., employees, customers, society, stakeholders, etc.). However, not all businesses care for employees or stakeholders; hence, organisations vary in their character and nature, which influences the behavioural patterns of their individuals.

Ethics in Business and Corporate Governance

8. Ethical behaviour of individuals in an organisation has been discussed vis-à-vis organisational character. In business, ethical behaviour and obligations of individuals make for a mutual relationship based on the organisational style, the law of the land, contractual duties and obligations, work environment, and the codes of general ethics (that are acceptable as moral and rational to general public).Therefore, the work culture is largely responsible for an overall ethical climate in the organisation, which ultimately influences the ethical behaviour of individuals. 9. The organisation is responsible for promoting and protecting morally legitimate interests and goals of the business, where individuals can work with clarity of purpose and direction of ethics. 10. Pursuing personal interests by taking advantage of power structures either of the management or the union is very common in industries, and a major source for violation of ethics in governance. An organisation has the responsibility to draw individuals into a climate of ethical behaviour, by demonstrating its ethical character and ethical functioning. In turn, the individuals have the responsibility to obey the moral and contractual standards of behaviour. The ‘path-means-andgoals’ of an organisation have an important bearing upon the way individuals behave within the organisation. 11. Analyses of ethical situations in organisations bring out time and again the necessity for an organisation to be fair, moral and ethical not only in dealing with its employees and systems, but also in setting ethical and legal goals and purpose of the business. 12. In today’s business environment, employees are the most valuable part of resources required for doing business.Their attitude, their ethics and their motivation impact the business processes and performances in most significant ways. Owing to the increasing employee importance, the human resource management (HRM) has become one of the most critical functions of an organisation. It has necessitated strict adherence to consistent ethical standards in HRM practices. Ethics are also considered a strategic measure for optimising the ‘internal strength’ of an organisation by reinforcing the motivation and skills of employees on the one hand, and maximising ‘external gains’ by building a ‘brand image’ that epitomises ‘good ethical standards’ on the other. 13. Many ethicists claim that the ‘ethics-and-individuals’ issue is not the same as ‘chicken-and-egg’; for ethics, it is the chicken-first situation, because ethics have to nurture, bear and breed morally healthy individuals who would abide by ethics and morality.. And finally, the chapter refers to various cases to illustrate how the task of the society and business—which is an integral part of modern society—is to create an environment and value system that promotes better individuals and ethical work culture in the first place.

Key Words and Concepts Rights of individual, regulators, moral philosophers, ethical protagonists, rational organisation, political organisation, caring organisation, duty–responsibility–accountability relationship, duty of care, ethics of care, human resource management (HRM), flow of power, law of agency, child labour, ethical responsibility, effect of masses, utility, ethical standards, path–means–and–goal approach, socio-economic environment, whistle-blowing, whistle-blower insurance.

Ethics: Individuals and the Organisation

Exercises Check Your Progress 1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

An organisation could be classified as ___________ Rights of individual are ___________ People down the structures in an organisation are driven to achieve their goal by ___________ Like operational processes, process for the management of ethics and ethical standards in the organisation have to be ___________ The caring model is not based on ___________ but on caring for those for whom the organisation has been designed, with whom it interacts and the people in the organisation themselves. One of the purposes of having an ‘ethics policy’ and ‘ethics management mechanism’ in an organisation is to ___________ Law of agency specifies that the ___________ Governments cannot always stop at ‘bottling up the practice by laws’; they must ___________ The ethical issues concerning the employees in human resource management arise from___________ Ethics could be a strategic measure to optimise the ‘internal strength’ of an organisation by___________

Review Questions 1. What are the types of organisational nature that we generally come across? If you were in an IT-enabled business organisation, what type of organisational nature and work culture would you prefer? Justify your answer. 2. Describe a generalised pattern of the ‘flow of power’ in an organisation. How does it influence individual behaviour in the organisation? 3. ‘Moral and ethical issues of individuals in an organisation are, thus, influenced by and dependent on the nature of the organisation and its work culture.’ Justify this statement. If possible, illustrate with an example from the business world. 4. ‘Law of agency specifies the legal duties of employees (agent) towards their employers (principals) and prohibits the agent (employees) to act in conflicts of interests with those of the principal (employer).’ To what extent, does this type of legal stand help or vitiate the atmosphere of ethics in an organisation? 5. Critically discuss the statement:‘Ethical behaviour of individuals can also be influenced by the organisation’s (business) goals.’ 6. How do the following influence an individual’s ethical behaviour in the organisation: ‘code of conduct and service rules’, ‘ethics policy’, and the organisation’s ‘path–means–and–goal’ equations? 7. Briefly discuss how Honeywell’s Code of Ethics and Business Conduct helps ensure ethics in their global business practices? List four important aspects of their ethical approach to business. 8. Discuss with illustrations: Why should ethics start at the top in an organisation? 9. ‘Everybody has the right to choose one’s own profession or work, but does not have the right to cause injury or unnecessary sufferings to others by his or her action or negligence.’ Critically discuss this statement with reference to some cases you know of. 10. ‘Greed breeds unethical practices and harms the society more than what the organisation gets or gives back to the society.’ Discuss this statement with some examples.

Ethics in Business and Corporate Governance

Further/Suggested Reading 1. Ethical Theory and Business (6th ed.); Tom L. Beauchamp and N.E. Bowie (Eds.), Prentice Hall, New Jersey, 1979 2. Business Ethics—Concepts and Cases (5th ed.); Manuel G.Velasquez, Pearson Prentice Hall, Delhi, 2002 3. Philosophical Issues in Human Rights—Theories and Applications; Patricia Werhane, A. R. Gini and David Ozar (Eds.), Random House, New York, 1986 4. Whistle-Blowing: Loyalty and Dissent in the Corporation; Alan F. Westin, McGraw-Hill, New York, 1981


Chapter Objectives

Ethics in Marketing and Consumer Protection To highlight the issues of ethics in marketing and their scope and coverage To emphasise the importance of consumer protection in marketing, and identify the ethical shortcomings and the responsibility in consumer protection To discuss the scope and span of consumer protection, its necessity in a developing economy and its ethical implications for the society To describe some approaches to consumer protection in marketing from ethical standpoints, and illustrate their working To discuss the ethical challenges in the marketing practice and their implications To highlight some ethical issues concerning the present-day Internet marketing To discuss how ethics can help in managing competition in the marketplace

Ethics in Business and Corporate Governance

INTRODUCTION ance ern ce Gov ernan ate Gov nance por Cor orate over nce and Corp ate G erna s ov d nce or nes usi ess an Corp ate G erna B or n d p in Gov usi an ics B ness nd Cor orate Eth ics in usi orp sa Eth s in B usines and C ic s B Eth ics in usines th B E s in ic Eth


Tobacco Industry used Cigarette menthol to recruit new Adolescents and Young Adult Smokers: Internal industry documents, independent lab tests, and survey data reveal strategy, Robin Herman, Harvard School of Public Health, July 16 2008. Ref: http://, accessed on 11 October 2011 1a,8599,1998055,00.html#ixzz1bHstr2zR, accessed on 20 October 2011

Ethics in Marketing and Consumer Protection

There are many instances of unsuspecting consumers being unfairly treated or fraudulently exploited. Case I represents an unethical practice in consumer marketing, and Case II represents a new type of fraud—the cyber fraud—where a false product is marketed by taking advantage of the helplessness of computer users, faceless transaction through the Internet and ineffective cyber laws and cyber administration. Internet marketing and frauds are now rising alarmingly every year. Apart from the fraudulent product marketing, described in Case II, nowadays it is quite common to receive calls or emails from the marketing personnel of financial, realty and consumer services companies offering apparently fair deals—with riders and conditions intricately woven into their offers, hiding the real purpose of the deals being offered. Furthermore, most of these deals favour the sellers in case of any default or damage, leaving consumers in the lurch. All these are happening in the market due to the nexus between unethical businessmen and ready-to-cooperate corrupt officials. Some may argue that it is a marketing person’s job to market a product and enhance the market share and consumer base of his/her product, and the marketing person is not supposed to do social work. But, does that mean he or she has to adopt unfair means and methods to do his or her job? Gaining market share and making profit by any means is neither good governance nor ethical nor sustainable. Such frauds or unethical practices either get revealed or punished by legal authorities or the customers run away from the organisations indulging in such unethical practices. Marketers have the responsibility to protect consumers from deceit and harmful effects (if any) of the products and merchandise they market. This is necessary to keep the market as a place for fair play where consumers get what they are promised in exchange of money they are asked to pay. Marketing (i.e., the process and people involved in marketing) has to balance between profitability and morality.

Ethics in Business and Corporate Governance

The norm of faithful ‘disclosure’ about the product (quality, quantity and character) must be adhered to in marketing—be it the customer-interfaced marketing, direct marketing or Internet marketing. Case I demonstrates that the focus is still on increasing revenues at any cost; ‘consumer protection’ is a mere cliché in marketing campaigns. Nonetheless, if we believe that ethics are essential for sustainable business then ethics have to be deep-rooted in all business practices including marketing. Marketers have to own up the responsibility for adhering to ethics in the marketplace and play a more effective role than what the current experience about their experience shows. Since the marketing personnel are in the forefront of a company’s efforts to reach out to consumers, they are in a better position to control and enforce ethical conduct in business by interfacing with the company’s management on the one hand and its consumers or users on the other. Protecting the interests of clients should be their ethical goal; they must appreciate that their interest in consumer protection would be reciprocated in their and the company’s well-being through consumer patronage. Marketing is uniquely placed as the face of a company through which it contacts and conducts business with its customers or consumers. (Incidentally, many do not regard customers and consumers as the same thing—consumers are statistics while customers are faces. But, in fact, there is a face behind every consumer). To most customers, it is the marketing wing of a company that represents the whole company and its work culture. Marketing is responsible for being faithful and ethical in dealings with customers. The marketing people are, in fact, the custodians of customers’ interests. Central to modern management and marketing practices is the concept of customer satisfaction and customer retention—a dual objective that can be achieved only through ethical marketing practices. This chapter discusses various important aspects of business and business ethics, with an emphasis on need–means–and–methods to ensure ethics in marketing and consumer protection.



Market is the place where people interface and interact with a company’s people, products and services. Market is the first link of consumers with the company, and ‘marketing ethics’ is the bond that binds the market with the consumers.Therefore, understanding the issues of ethics in marketing is of paramount importance for marketing professionals. Marketing ethics deal with the following: (a) The ethicality of products and services being marketed (b) The ethicality of the process and means of marketing (c) The ethics in advertising and product promotion (d) The ethical conduct of marketing personnel (e) The ethicality of marketing goals and targets (f) The ethical responsibility for the sales made Marketing is about creating a condition where people willingly buy what they want for fulfilling their legal, moral, psychological and intellectual needs. Therefore, personal ethics of marketing personnel and ethical imperatives of the marketplace are integral parts of marketing

Ethics in Marketing and Consumer Protection

operations. The ethical issues of marketing operations arise out of product offerings, pricing and price fixing mechanism, marketing process, marketing channels, services and contractual obligations. The aim of ethics in marketing is to protect and promote the interests of consumers and thus win the customer confidence and perpetuate the legitimate gains for business. Ethics in marketing is, therefore, a strategic game for ensuring profits and sustainable growth by balancing ‘profitability’ with ‘morality’. The issues of profitability are well-established in the arena of traditional ‘business management’, but the understanding of the ‘issues of morality in business’ is still vague and varied. Following morality in business is generally treated as ‘ex gratia’ to customers and consumers at large. Marketing being largely responsible for generating revenue for the company, the marketing people are sometimes tempted to resort to unethical means to maximise revenue or to meet inflated sales targets. Unethical product promotion, non-transparent sales and service conditions, false and misleading advertisements, and predatory pricing with conditions attached are some examples of unethical marketing drive. The issue of morality in business is getting further complicated due to the misuse by some unscrupulous people of the otherwise well-meaning communication and information technologies. Today these technologies are being increasingly used in cyber-marketing, direct marketing and e-commerce. Developments of communication technology and information technology have changed the face of marketing—both for better and for worse. The flip side of these technologies is that using them it is easier to deceive customers if one wants to. For example, ‘mass marketing frauds’ have been a serious concern in today’s technology-driven markets globally.1b The Internet, which is being increasingly used for product promotion and marketing, is largely a ‘boundary-less network’, which makes it difficult to establish the ownership and responsibility for the contents and offers made through it. Hence, the Internet has emerged as a convenient means for unethical marketing. As today the Internet is a fundamental component of the civil society, marketers cannot escape their ethical responsibility while using this revolutionary communication medium for advertising or selling. Ethics of marketing must also apply to the cyber or Internet marketing in the same way as they apply to traditional marketing in the civil society. The use of the communication and information technologies in marketing has thrown up several new ethical issues. Some of these issues are listed below: 1. False and misleading product advertisements in electronic and cyber media. 2. Exploiting social paradigms for market promotion (e.g., promotion of fairness creams for dark-complexioned females through TV advertisements). 3. Predatory pricing by the big and mighty organisations to wipe out competition in the market. 4. Surrogate advertisements. (These are used to promote alcohol and cigarettes whose advertising is banned in India.) 5. Intrusive service promotions, compromising the confidentiality of company-client relationships and violating the privacy of customers (e.g., freebies and add-ons offered by telecom and Internet service providers for collecting personal data). 1b, accessed on 7 October 2011 on Mass Marketing Fraud.

Ethics in Business and Corporate Governance

sensitivities. With the global reach of business, the last mentioned issue of national, local and cultural sensitivity has assumed greater importance, and it requires careful handling by multinational companies when they launch marketing drives for new products or services. For example, in India, no marketing advertisement is permitted which derides any race, caste, colour, creed and nationality.2 Marketing as an organisational mouthpiece has to own up the ethical responsibility in these areas of activities and stop indulging in unethical practices despite the tempting ease of exploiting the market through electronic-media advertisements or Internet-based marketing channels. The ethical issues in marketing are illustrated in Figure 5.1. Ethical lssues in Marketing Relate to 5-Ps:



Process (of marketing)

Promotion (of products)

People (consumer protection)

Figure 5.1 Ethical Issues in Marketing

Apart from special ethical issues in marketing arising from mass-media advertisements and Internet-based marketing channels, the fundamental issues of ethics in marketing can be related to 5 Ps of marketing, as described below: • Products: Are the products ethically right for the consumers and beneficial to the society? • Price: Is the price commensurate with value (utility) it offers? Is it fair and competitive? • Promotion: Do the promotional features give a truthful presentation of the products on offer? Is the promotional campaign exploitative of the consumers’ ignorance or social customs and myth? • Process: Is the marketing process ethically right and legal? (The process also includes the ‘place’ through which marketing is effected, for example, the marketing channel, logistics, etc.) • People (Consumers): Does the marketing effort harm or hurt the consumers, the competitors or the society in any known or unknown manner?

2, accessed on 12 October 2011

Ethics in Marketing and Consumer Protection

Ethical violations in each of these areas can be cited aplenty,3 even in large multinational companies, but that is not the scope of deliberation here. The purpose of this deliberation is to introduce the readers to various sources of ethical concerns in marketing operations. And, some of these concerns will be addressed later in the chapter. The purpose of identifying the sources of ethical issues in marketing is to find ways and means to correct them, as far as possible. The strategy of ethical marketing to gain market leadership will fall flat if we fail to effectively build ethics into our organisation’s work culture and in the marketing policies and programmes. And, for implementing ethics in marketing operations, we need to bring about a change in the mindset of marketing personnel. They should shift from the traditional marketing approach of ‘profitability’ to the ethical approach of ‘profitability with morality’. The marketing personnel need to have a sense of ethical responsibility towards their customers and consumers. This requires identification of ‘gaps and fillers’ in organisational systems, culture and commitments to ethics by examining the relationships between the fundamental issues of ethics in marketing (i.e., 5 Ps as mentioned above) and the organisation’s ethical culture and marketing functions. Broadly, relationships among these fundamental issues can be related to: (a) The organisational and corporate culture for ethics (b) Industry practices and the business environment (c) The marketing personnel’s moral standards and commitment to ethics (d) The social and consumer culture as reflected in the marketplace. These are, in fact, the ethical attributes of a company, and their quality largely influences the ethicality of the company’s marketing approach for product promotion, pricing, advertising and channelling the products to consumers. It is essential for the marketing personnel to be aware of the various issues that can cause conflicts between profitability and morality of their actions. It should be recognised by the marketing group that consumers and the society have the right to be informed, the right to be heard, the right to choose and the right to safety and protection from harm. Any shortcoming, violation, infringement or denial of these rights would be termed unjust and unethical. Since marketing is a process that directly interfaces with the consumers and the society, the marketing personnel have a direct responsibility to respect and honour the consumer rights.

5.2 IMPORTANCE OF CONSUMER PROTECTION A product is a product if it has a market, i.e., a consumer. Hence, the end of a business process can be described as: ‘selling of the product in a market to a consumer, realisation of money for the sale, guiding the consumer for safe and trouble-free usage through product demonstration or a product manual, and servicing the product as promised in the sales brochure or sale contract’. In earlier chapters, we have mostly discussed the ethical and moral issues relating to functions within the organisation (i.e., of employees, managers, management, agents, etc.) and their impact on the individuals, local people, the society or environment. Role of ethics 3, accessed on October 2011, and, accessed on 11 October 2011


Ethics in Business and Corporate Governance

in the marketplace—manifested through the marketing and servicing personnel or the organisations itself—in producing, selling and protecting the consumers is as important as ethics within and inside the organisation. Significantly, ethics are even more important when the products marketed are for children or those that may adversely affect the health of citizens. For instance, in Case I, were the cigarette companies being ethical in altering menthol level of cigarettes with a view to hook (unsuspecting) young smokers? Who should protect the consumers against such dubious business practices to perpetuate sales? Surely, the objectives of business are not limited to making profits, but also go beyond in contributing to the well-being of the society and the nation. Consumers are a part of the society that supports a business; ‘a business exists for the consumers and not vice versa’, goes a popular saying. Therefore, protecting consumers from harm and damage is, in fact, a part of marketing responsibility—though the related policy decisions could originate from some other corner of the business organisation. Consumers are not a homogeneous mass; they can be grouped into many segments across many strata.All unfair and unethical marketing practices may not harm all the consumers equally adversely. For example, unethically marketing a consumer durable (e.g., car or refrigerator) may lead to difficulties for the customer, but the unethical marketing of a spurious drug or food product can cause the death of a child. However, this does not allow, even in principle, any dubious or unethical marketing in any field of business for any kind of product, because that would violate the basic rule of marketing—customer care and customer satisfaction. This is especially true for children and other weaker sections of the society who would suffer the most if the consumable products did not meet ethical standards and quality requirements. Children need special protection as consumers, from the ill effects of consumables (product quality). Can a company market a health drink for children, laced with an addictive drugs (howsoever small in quantity) to build preference for the product vis-à-vis the competition, and still claim to be ethical? Can a medical practitioner prescribe use of unnecessary medicines or an overdose of steroid while treating a child? (Here, ‘patient’ is viewed as a consumer of medical services.) One may argue that it is for the country’s regulatory authorities to oversee such unethical acts and crimes, but then, that is also true for most other unethical work and issues.Yet, so many people, professionals and businessmen are flouting these norms and rules for the sake of greater market penetration and profits. Adulteration and other such unethical marketing practices are not uncommon in developing countries, including India; numerous children suffer from permanent health damage due to spurious foods and drugs. In fact, there are companies manufacturing toys using toxic material—unmindful of how harmful they can be for a child. Let us view one such example: When, during 2007–08, the health of many children suffered neurological damage and death, after the use of toys made in China and imported by the US, several consignments of these toys had been recalled.4 They were found to contain toxic material (like lead paint), which is not only harmful for children but is also banned in the US. In fact, the production head 4,2933,293054,00.html, accessed on 4 August 2009, and, accessed on 12 October 2011

Ethics in Marketing and Consumer Protection

of one such Chinese toy manufacturing company even committed suicide owing to his sense of morality and wrongdoing. The huge amount of complaints of sickness and side-effects amongst children, and the social pressure created by this issue forced the US government to intervene—whereby thousands of toys were withdrawn from stores across the US and destroyed. Import of such items from China was banned until further investigation and correction. On the flip side, in India, the sale of such harmful toys and games continues in roadside shops, with manufacturers continuing to produce such items, and sellers selling them unmindful of the seriously damaging side-effects in children. Worse still, parents continue to buy these toys—equally careless about how harmful toxic material can be for children.

While India, too, banned the import of children’s toys from China much later (after the US did), other such violations continue unabated in the country. So, where does the buck stop? And who is responsible for this unethical act? If rules, regulations and laws were able and sufficient to prevent such harmful practices, there would be no need for moral teachings, codes of moral conduct, value-systems, social strictures and pressure, and, above all, ethical principles in business. Most countries may have instituted rules, regulations and laws for progressive or punitive action, but these are also violated by individuals driven by greed and profit. Rules, regulations and laws are external to an individual, but ethics and morality are internal to him or her—exerting an internal force for self-correction and self-regulation, and thereby making one think and act conscientiously and harmlessly. Hence, discussions about ethical issues and moral responsibility in the marketing of consumables and other products are necessary for understanding the ethics of business in the marketplace. Marketing toys or foods harmful to children would be ethically wrong, regardless of whether the country has any regulatory direction to that effect. Individuals or a company marketing such products to child consumers or sick people must be doubly careful and self-regulating; ethics in a marketplace cannot be regulated by rules and laws alone; they have to be inculcated in the organisation by a principled approach to business, moral attitudes and commitment to ethical governance. Individuals engaged in marketing should be encouraged and empowered to be moral and ethical in their dealings—as a priority over profits. Consumers are not simply statistics; there is a face behind every consumer who has his or her own needs and requirements which should be fulfilled by ethical means if the business aims to progress and grow in a competitive environment.

5.3 WHO ARE CONSUMERS? WHAT DOES CONSUMER PROTECTION MEAN? Consumers are those who buy and use products with the intention of fulfilling their basic, selfperceived or introduced needs. For example, foods and beverages are a basic need; refrigerator or television is a self-perceived need; fashion and toys are an introduced need. Consumers buy with the belief that these goods or consumables would fulfil their needs; they have right to be protected from any deviation, if it exists. It is necessary to declare the date of manufacturing and expiry (of the product), major ingredients, precautions about any harmful effect, weight and maximum retail price (MRP), methods of preservation or storage, etc. for all consumables, in keeping with the consumer protection laws or similar regulatory enactments in a country. The idea, here, is to protect consumers by giving them correct and complete information,

Ethics in Business and Corporate Governance

thereby making them aware about the products they buy. Yet, it is not uncommon in Indian cities and towns to come across pouches of milk or some soft drink being sold to unsuspecting customers even after the product has crossed its expiry date (or ‘best for use before …’ date). Most of these products are made by reputed companies, and distributed in the market by their sales personnel or direct selling agents. Shops and distributors of such consumables are so concerned about meeting their sales targets and clearing their stocks that they neglect to return old stocks to manufacturers or to inform buyers about the same. An unsuspecting buyer using some such products may suffer from vomiting or flatulence or a more serious ailment—and the damage is far worse in the case of children. There should be a system whereby distributors or manufacturers either recall or withdraw such products from the market, but this is often missing in the marketing system. As a result, buyers get a product that they did not want, children (the consumer) get bad health and producers make undue money. How a society deals with this? Ethics of consumer protection and marketing should address such problems. There are numerous complaints5 filed against defective products being marketed to consumers—be it consumables like food and drugs or consumer durables like refrigerator, television, car or washing machine. While it may be argued that consumers are educated and informed enough to make their decisions and choices in buying what they want; yet, this remains a difficult proposition in a society where most people are in no position to gather all relevant and factual information about a product or to understand the implications of its usage. In a country like India, for instance, where consumerism is still in its nascent stage, and where consumer protection systems and methods are evolving through experiences and grievances, manufacturers or marketers have the responsibility of strictly following the norms—related to the sale as well as after-sales services of their products—in accordance with professional, national or international standards and laws governing that product type. Competitive advertisements and different kinds of sales promotions that may confuse the consuming public (and thereby induce them to buy an unsatisfactory product) should be self-regulated and ethically censored by the industries themselves. This, however, cannot stop a producer from producing goods that have a market, unless the goods involve some banned material that is unsafe for consumer health or environment (e.g. chlorofluorocarbon in refrigerators or air conditioners), or violates (human or environment) safety norms. In the production and marketing of consumer goods, it is not the price or profit but the means and methods of marketing and selling the products to consumers that is the concern of ethics and ethical practices. These consumer products can be foods, drugs, beverages, chemicals, electrical or electronic goods and consumer durables among others, but the marketing rules—of fairness, transparency and ethics—remain the same for all types of consumers. To cite one case of manufacturing negligence in electrical appliances: In the case of a short-circuit fire that considerably damaged a house, apparently, the domestic ‘power inverter’ was found to have violated the safety norms required in electrical back-up systems of its kind. For the same, the customer (whose house had caught fire) was awarded suitable compensation (Rs. 2.5 lac) by the Delhi State Consumer Disputes Redressal 5,, and, accessed on 31 July 2009

Ethics in Marketing and Consumer Protection

Commission.6 This cannot be ruled out as an isolated, freak case; in fact, in 2008, the Delhibased consumer organisation—Consumer Voice7—had tested nine brands of inverters sold in the market and found that none of them met the quality standards set by the BIS (Bureau of Indian Standards), nor had they secured the mandatory ISI (Indian Standards Institution) certification. It was found that these products did not meet even the minimum safety standards, and, yet, were being sold largely due to the ignorance of consumers and unethical business practices of marketers. If we, in India, had a Consumer Product Safety Commission, as they do in the US, all such products (which did not adhere to safety requirements) would have to be recalled from the market, investigated for the fault, corrected and re-tested for certification before they were allowed to be sold in the market again. And, no plea related to the ‘own free choice’ of consumers would stand in the way of awarding product failure liability—which also works as a deterrent to such unethical practices. In summary, the aforesaid case illustrates total violation of ethics in the marketing of a product that, in turn, also violated the moral responsibility of guarding (or assuring) the safety of consumers.

The list of defective or inadequate products being sold in the country would be very long— despite the many regulatory checks and controls. Not only that, consumers seeking ‘after sales service’ often get a raw deal, no matter how essential regular servicing may be for the functioning and safety of their products. Consumers can be careful but cannot be experts in the respective fields to know what he or she should get or is getting into. There have to be well-established consumer protection bodies as well as well-thought-out campaigns for consumer awareness in the country, to work as a deterrent for fraudulent and unethical marketing. However, ethics experts believe that what is needed is a change in the attitude of businesses and a sense of moral duty towards consumers at large. Many claim that unethical practices in marketing arise from a shortage of the right goods at the right time—as compared to their respective consumer demands. Furthermore, when the market behaviour is price-sensitive, some manufacturers tend to take advantage of lower pricing by offering products that are inadequate in quality and safety. Hence, consumer protection and consumer safety in marketing goods and services are best served in a ‘free market’ condition —where sellers respond to consumer demands and expectations with open and ethical minds. So, while consumers have the responsibility to indicate their preferences (e.g., fuel efficiency of a car) and pay the price willingly, the sellers are responsible for understanding customer needs and requirements and selling accordingly. The driving force behind ethical behaviour in a free market is the force of competition; if a customer is not satisfied with the product of one manufacturer, he or she may go to another one, competing in the same market and offering an alternative product. Thus, the seller or salesman of the former product, who lost a customer due to the inability of his product to fulfil specific requirement(s), would do well to advise

6, accessed on 29 October 2009 and, accessed on 29 October, 2009 (refer to Consumer Voice magazine, 2008 issue)


Ethics in Business and Corporate Governance

his company about modifying or improving that product, thereby leading to the creation of a newer, better product option for the customer(s). Thus, for a truly free market situation, not only is the cardinal rule of listening to the ‘voice of the consumer’ fulfilled in a business, but the customers are also enabled to buy only those goods which they want, without loss of value. So, do ideal free market conditions exist in practice—where marketers and consumers are mutually dependent so as to satisfy each others interests? Indeed, to bring about such a win-win situation in the marketplace, both marketing personnel and individual buyers have to display high moral standards and strict ethical behaviour. Certain features and qualities of most products endanger safety during their usage. A few examples of such product features are: chemicals and chemical ingredients in drugs, foods and paints, and plastics and polymers used in children’s toys and garments. Similarly, the quality of electrical appliances, cut-off switches in electrical switchboards, heating and cooling mechanisms in engines, etc. are a few critical features for safe usage. Nowadays, in most countries, both the government and standardisation procedures try to safeguard consumers with regard to these features through affixed regulations and standards. Consumers are advised to buy and use goods that adhere to these predetermined quality and safety certifications, in order to protect their interests. In a free market, these regulations could follow the minimum standards of quality and safety needed in products—and not necessarily the ultimate, in case the consumers want products of better quality and higher safety. However, in a free market, many manufacturers go far beyond these basic specifications to cater to consumer choice. In a free market, consumers are the principal factor that determines what to market, how, where and at what price, but such consumers must also be able to identify what to buy and use. They have to be educated enough to know what they want and why they want it. Thus, consumer education plays a big role in a free market society for effective consumer protection. Establishments like consumer counselling forums, consumer protection courts, and consumer grievance cells operated by the government or by independent (NGO) agencies, educate consumers and help eradicate their problems. Company brochures and offer documents, online information (Internet) and product data also guide and serve the consumers and protect their interests. As per legal and constitutional provisions in India, everybody has the right to information about the product and services as per interest. Yet, crux of the problem is the voluntary disclosure of information and data by the manufacturers, their marketing personnel as well as the consuming public. Ethics demand that a company should disclose the essential features and safety measures of a product for consumption or use, but that may be on inquiry (from a potential buyer) and may not be voluntary (except to the extent of being advertised). Thus, there is a gap between what marketing does and consumers want; a gap that could be filled by consumer education, awareness, information flow and the transparency of marketing personnel. It is especially urgent to attend to this gap in India, where consumerism is rapidly growing, to prevent widespread discontent, dissatisfaction and despair of a huge consumer population in both urban and semi-urban society (consumerism has yet to significantly reach India’s rural areas). Experts claim that the full benefit of free market can be obtained only when market— including consumers—fulfil the following characteristics: (i) there are numerous buyers and number of sellers to promote a competitive marketing situation; (ii) everyone can freely enter

Ethics in Marketing and Consumer Protection

and exit the market (and has access to goods and articles to sell and buy); (iii) everyone has correct and complete information about the products; (iv) the product from a manufacturer is similar, i.e., there is no variation in either quality or price from store to store; (v) all buyers and sellers are ‘rational utility maximisers’; (vi) the goods have no external or hidden costs; and (vii) the market is not controlled by any authority nor curtailed by a group of manufacturers. However, the third point in this list (correct and complete information) and the fifth (consumers are rational individuals who maximise the utility and satisfaction from the goods they buy) may not exactly be tenable in practice. Furthermore, there are variations in practice of free market conditions relating to characteristics (iv), (vi) and (vii) in the earlier list. Such free market deviations and variations make it truly difficult to follow ethical transactions in the market. Most manufacturers, though quite knowledgeable about their products (e.g., an automobile manufacturer), are reluctant to disclose all safety and defect related information (including feedback from the market) to customers owing to the fear of complicating sales. Consumers, on the other hand, may not be able to collect all relevant information as that could consume time and money. Not to mention, a consumer may not be able to fully appreciate what he or she is buying (meaning, the consumer may have product-relevant information, yet he may not be an expert to appropriately interpret that information). Therefore, dissatisfaction about buying a product may still persist. In this way, the solution to the problem of ethical marketing and serving the consumers, even in a free market condition, remains elusive. Without probing into the assumption that sellers (marketers) are ‘rational utility maximisers’, let us examine if the consumers are that way too. One view—challenging that consumers are always rational in approach and maximise the market opportunity to utilise and be satisfied with their purchases—assumes that consumers are (a) ‘budget minded’ individuals who can think well ahead, and are able to wait for the right buying opportunity; and (b) individuals with well-defined and consistent product preferences that are based on knowledge and information, and are clear how their choices will affect their preferences. Unfortunately, consumer behaviour in the marketplace suggests otherwise; in that, consumers, in buying the product(s), are often irrational and inconsistent in both their choice and their judgement (i.e., if the product use or function will meet their expectation). This is because consumer judgements are based on what they deduce from a set of data, information and behaviour and the probability thereof. And, in such cases, when the probability goes astray due to reasons that vary from self-belief or individual notions, to casual approach in arriving at an estimate, and generalisations based on small sample findings or inadequate data. Consumer research has often shown that people are irrational and inconsistent when it comes to weighing choices based on probability (vis-à-vis future estimation) and payoffs (vis-à-vis value for money).As a result, we often underestimate the risks involved in our actions as consumers of certain types of foods, drugs, cigarettes and many other products that may damage our health and well-being. The printed warning, ‘Cigarette Smoking is Injurious to Health’, on every pack of cigarettes is a directive to protect consumers from the irrational evils of smoking. Similarly, there are warnings raised about consuming some food products or ingredients and the indiscriminate use of drugs. “Yet, many consumers disregard such warnings and continue making irrational product choices—casually and without thinking about the consequences (of product usage).”

Ethics in Business and Corporate Governance

Therefore, it is also up to the consumers to be careful (in selecting and purchasing the product) and act rationally so as to protect their own interests. In protecting consumer interest, manufacturers or marketers have an even bigger role to play because it is they who are best acquainted with the nature of the product (i.e., if it has any harmful feature or effect) and who can best inform the consumer about product usage (i.e., applications or precautions). Many a time, manufacturers or marketers are not really serious about protecting the interests of their consumers, especially if they have to do so at the cost of their business. Here, we consider one such example: Printing the statutory warning that cigarette smoking is injurious to health is a mandatory requirement, which cigarette manufacturers follow. But, do they really mean to caution people and deter them from smoking? Or are they merely complying with certain regulations, oblivious of the effects of smoking? Nonetheless, such regulatory moves8 to caution consumers may lead to some fall in cigarette sales, which may force the manufacturers to find ways by which to reduce the harmful effects of nicotine intake from cigarette smoking. One such attempt in this direction is the ‘tipped cigarette’, although its benefit has been very small. On the other hand are some unscrupulous cigarette manufacturers who even go to the extent of manipulating menthol levels in cigarettes to get youngsters addicted to smoking (refer to Case I in this chapter). As cigarette smoking continues, thousands of smokers are meeting untimely death, not to mention how passive smoking is affecting children and rendering them deficient in many ways. Cigarette manufacturers—unmindful of this damage to individuals and society—continue to expand their businesses; their advertising budgets go higher as they continue to promote their products. The warning signs on the packets are merely symbolic compliances with the law, and mean nothing more to cigarette manufacturers in terms of protecting consumer interest.

Then there are those manufacturers or producers who aggressively promote their products in the marketplace—knowing fully well that their products could be harmful (not beneficial) for users. Some such potentially harmful or not-so-beneficial products being promoted in the country are many types of cold drinks, cosmetics, electronic products and the so called ‘ayurved and herbal’ products. Reports of fraud are also being reported from the emerging fields of biotechnology and hybridisation. Take, for instance, the recent reports about Indian farmers being duped into buying low quality ‘hybrid’ seeds as high-yield, fast-growing seeds; let us view the example as follows: According to a news report (The Telegraph, Kolkata, 21 October 2008), a Hyderabad based company sold a certain variety of rice seeds to some farmers in a remote area of West Bengal, in India, claiming that it was a fast-growing, high-yield variety. While the seed manufacturer had said that the crop would be ready to harvest within four months, the farmers found that it did not flower even after six months. Finally, farmers had to destroy that crop to make the land available for another type of cultivation. Thus, they not only lost the yield from their

8, accessed on 30 July 2009

Ethics in Marketing and Consumer Protection

land but also failed to repay the bank loan they had taken to cultivate their land. As per the same report, this had created serious repercussions in the area, with some farmers having planned to take the seed manufacturer to court in order to recover their losses.

Unsurprisingly, every year hundreds of farmers commit suicide due to crop failure and the financial burden on their families, considering they are mostly marginal farmers surviving on the fortune of good yield. While such violations amount to crime against humanity, such situations in society gives rise to the eternal question: Where does a manufacturer’s duty to protect consumer interest begin, and where does the consumer’s duty to protect self-interest end? Issues related to consumers and consumer protection, therefore, need to be examined further from the standpoint of ethical principles and approach.

5.4 APPROACHES TO CONSUMER PROTECTION Experts approach consumer protection from three different angles, namely: (i) The ‘contract view’ of duties to consumers in business; (ii) The obligations for ‘due care’ in business dealings; and (iii) The ‘social costs’ view. The contract view places greater responsibility on consumers, but the views pertaining to due care and social costs place considerable responsibility on manufacturers and marketing. A brief discussion of these views is necessary to better appreciate consumer rights vis-à-vis manufacturers’ (or dealers’) responsibility. (i) The Contract View According to this view in business, relationships between customers and suppliers are essentially contractual in nature, whereby the supplier’s moral duty is created by the contracted terms. Let us elaborate with the example of buying a refrigerator discussed in Section 3.1. Here, as per the contract relationship, a customer voluntarily enters into a sale contract with the supplier (dealer) to buy the refrigerator —after its features, characteristics and quality have been made known to the customer. The dealer knowingly and freely agrees to give the consumer that product whose characteristics are now known. In turn, the consumer freely and knowingly agrees to pay the agreed price for that product (refrigerator). According to this virtual agreement, the dealer has the ‘duty’ to provide a product with those characteristics that are made known and the customer has the ‘correlative right’ to receive a product with the same characteristics after the payment of the agreed price. What, then, can go wrong in this contract? Rather, such a contract is morally correct if: (A) Both the parties in the contract have full knowledge of the nature of the agreement they are entering into and its binding conditions; (B) Neither party in the contract has the intention to misrepresent facts to the other party; (C) Neither party in the contract is forced to enter into the contract under duress or undue influence; and (D) Both parties in the contract have sufficient knowledge and information about the product being offered (sold) and accepted (bought). Therefore, if the consumer has not received the right product (refrigerator), which is tested and trouble-free, and if the dealer has not intentionally (with prior knowledge) despatched

Ethics in Business and Corporate Governance

the wrong product, then the customer can only claim replacement of the product—and not a refund (of money) nor exchange (for another brand or model of the refrigerator). However, in this case, the manufacturer is apparently guilty of selling the wrong product to the dealer—in clear violation of the manufacturing and testing process, and the mandate of quality standards. Here, the consumer claims a refund or exchange, only if the dealer cannot replace the sold product (with another one that is tested and certified). Because, as per contract condition D, the contract is vitiated by the dealer’s failure to supply the right product, with the assumption that, in the first place, the dealer had no (sufficient) knowledge about the product being offered (sold). As a result, the customer is free to ask for a refund or replacement as per his or her choice and at the applicable price. Thus, the contract view lays four moral duties upon the business: comply with the terms of the sales contract; make full disclosures about the nature of the product; avoid intentional misrepresentation; and prevent the use of undue influence or duress. Thus, by acting in accordance with these duties, a business (run by a dealer or manufacturer) recognises the right of a consumer to be treated as a free and equal partner in the contract. This implies that any affirmation of the fact or promise made by the seller to the buyer, relating to the goods and service, becomes part of the basis of the bargain, and creates an express warranty that the product shall conform to that affirmation or promise. While this should be the moral condition, there are many violations of this contractual understanding and obligations, especially in the case of consumer, financial and insurance products. In modern retail, some may argue that manufacturers of consumer goods seldom enter directly into any contract with the consumers; the retailer or the dealer is responsible for the contract. Then, how can the manufacturers have contractual duties towards the consumers of their goods? Yet, there is no denying that manufacturers describe and advertise their product through various media. They also describe to their dealers about the quality and testing procedures for their product and explain that it is certified for use. Therefore, these advertisements, procedures or descriptions in this regard should act as promises—made to prospective buyers—of those characteristics and attributes of the product that are advertised.The ‘tested’ or ‘certified’ markings should further guide the dealers to corroborate the quality and character of the product in leading consumers to buy it. Thus, retailers or dealers serve as conduits for manufacturers (and, hence, the products) in the chain of manufacturing and marketing a product. By this chain of events, manufacturers forge a virtual contractual relationship not only with the retailers or dealers but also with the ultimate consumers of the products. As a consequence, a contractual relationship created by the manufacturer through advertisements or otherwise, creates an ‘implied warranty’ obligation and duty towards the ultimate consumers, which has to be fulfilled. Any failure in this regard would constitute incompliance to the contractual obligation, and the customer would be right in seeking appropriate redressal. According to contract view, the most important moral duty of a business is to provide consumers with products and services that live up to the company’s claims made either through media (advertisement, brochure, etc.) or by the sale contract. The sellers are also duty-bound to fulfil any implied claims that the company or its representatives make about the product at the time of the sale. The case of ‘high-yield, fast-growing seeds’ cited earlier is an example

Ethics in Marketing and Consumer Protection

in this regard; it was the manufacturer’s duty to abide by the promise made to the farmers, as inducement to buy (i.e., the crop would be ready to harvest in four months). In general, a product or service is offered in terms of four variables: reliability, maintainability, safety and service life. Products should perform in keeping with these predetermined or promised expectations of consumers. Manufacturers have the duty to satisfy consumer expectations in order to protect consumer interest. Here: Reliability refers to the probability that a product will function as the consumers are led to expect it to function. If the product does not function in that way, the producer is dutybound to rectify or replace the product, generally within the warranty period. For example, if a consumer buys the refrigerator expecting that it will keep vegetables fresher than other refrigerators because of its ‘cross-flow’ feature (as shown in the sales promotion campaign) and it fails to do so in reality, then the dealer or manufacturer has the duty to change the refrigerator or rectify the feature within the guarantee period. And it would be the same case with any other product—be it a car, washing machine or television. In countries where consumer protection laws are very strict or harsh, it is not uncommon for products to be ‘recalled’ from the marketplace on reliability grounds, i.e., for probable malfunctioning. Maintainability relates to the ease with which a product can be repaired and retained in its working condition without much loss of efficiency. Many car manufacturing companies give a spare parts replacement warranty for a stipulated period or mileage in order to maintain the expected performance of their product (car). This practice is also prevalent for a few other products, like electronic goods. But, in the fast-changing electronic goods market, parts of old model are not available as the respective features become obsolete, and, hence, it is not possible to maintain the product.Thus, unsuspecting consumers who are happy with the product quality and performance for the first few years, find themselves in a bind of having to scrap an otherwise desirable product.Today’s marketplace, with its rapidly changing product models and features, is so dynamic that consumers are often toeing this line as fate accompli. However, the manufacturer’s duties (towards consumers) still calls for the responsibility to either design products with high degree of reliability (so as to minimise the scope for the failure of the product or its parts), or ensure the supply of its spare parts in the market for a minimum period (say 10 years) after launching the product. Safety is perhaps the most critical requirement that must be guaranteed in a product. Product safety refers to the risk associated with using a product (in a way that could be detrimental for the consumers or the environment) which should be ‘acceptable’ or ‘reasonable’. Arguably, the usage of most products lends scope to some type of risk or injury, but this too should be established by the manufacturers and made known to the buyers. In other words, consumers should be able to buy goods with known levels of risks along with a prescribed measure of precaution that would minimise its ill effects. Failing this condition would amount to violation of moral duty in marketing a product. If manufacturers or dealers themselves do not know about the safety hazards associated with the product, marketing ethics would call for sufficient efforts to know about the safety hazards and possible precautions. For example, a manufacturer of a critical drug for AIDS must be aware of the quality of chemical ingredients being used and their possible effects on human body. This drug manufacturer is duty-bound to seek approval

Ethics in Business and Corporate Governance

from a competent drug control authority in the country who would best know the ill effects of variation in chemical quality. Similarly, while marketing their products, manufacturers must disclose the risk and side effects involved in using the drug with appropriate signs and symbols, if any, along with other precautionary measures. Any failure in taking such precaution may further complicate the health of an already sick person, which would constitute violation of ethics and moral duty in the business. Service life refers to the time period in which the product functions with the normal wear and tear in sync with the service conditions and precautions mentioned in the product brochure or sales communication. Claims about the service lives of products have to be fulfilled by the manufacturers. Manufacturers have the duty to clearly specify the method of using the product for effective service and expected service life; consumers have the duty to use the product as per the instructions. Nonetheless, like maintainability, the expected service life of a product often gets reduced with usage. These products cannot be restored to their former service due to obsolescence in the marketplace. This happens in almost all the areas of marketing consumer durables, as product features are ever-changing—even in cosmetic or stylistic aspects—and, as a result, replacement for worn out parts of earlier models are unavailable, making the product redundant. Nowadays, manufacturers focus on adding new products to the market rather than on serving existing buyers with features that ensure the projected service life.The most obvious example, here, is the maintainability and service life of personal computers (PCs), wherein every part of the product is fast becoming obsolete. As a result, many individual PC users (who would otherwise keep using the older models for longer service life), are being forced to change both hardware and software to keep up with product availability, latest facility and market dynamics. Thus, the ‘contract view’ requires that manufacturers are aware of certain duties and responsibilities involved in ensuring that the selling and buying are both fair and just. Consumers may not be truly equal in a contract, because they cannot possibly be as knowledgeable as the manufacturer with regard to a product or service and its final utility and safety. Moreover, consumers do not have the time and opportunity to find out the actual details pertaining to product utility and safety. Therefore, success of the contract view approach in consumer protection lies in manufacturers and sellers being true to their contentions about a product and its utility and safety, without circumventing the deficit in it. In fact, the equality assumed in contract theory is more an exception rather than the rule. As a consequence, consumers in most countries continue to suffer even in free market conditions. (ii) The Due Care View In this view, consumers and manufacturers are not equal; consumers are vulnerable to harm caused by manufacturers’ actions based on the opportunity provided by their knowledge and expertise about their products, on the one hand, and the consumers’ lack of knowledge and acquaintance with the products on the other hand. Thus, in the marketplace, manufacturers are in more advantageous position than consumers. Hence, ethical principles of business demand that manufacturers or sellers have the duty to take care of the interests of consumers by not harming their expectations about the products. Here, the doctrine of ‘buyers beware’—applicable

Ethics in Marketing and Consumer Protection

to the contract view—is replaced by ‘sellers take care’. Due care, in effect, not only makes it obligatory for the manufacturers to ensure that buyers get the goods and services that live up to all the explicit and implied product claims, but also makes it their duty to exercise care so as to prevent harm or injury by the products. For example, ceiling fan manufacturers not only have to ensure that the fan delivers and circulates air (as claimed or implied in their sale deal), but also have to ensure the right mechanism so that the fan blades do not work loose causing any accident or injury. Thus, the theory of due care involves the manufacturers in all stages of product development (from design to final testing to marketing) with a view to ensure product quality, reliability and safety for consumers. Failure at any or all steps would mean a breach in the moral duty to exercise ‘due care’, notwithstanding that a seller may have insisted and a buyer may have accepted a ‘disclaimer’ excusing the manufacturer from any such liability. Due care is based on the principles of ‘relationship of dependence’; in this regard, the ethics of care impose the condition that manufacturers have a special relationship with their consumers (to ensure that enough care is exercised to meet a particular customer’s needs at the time of offering the product), and also safeguards a third party from any ‘harm’ arising from product usage. A simple example would be the electrical ‘doorbell’—it should not only meet customer requirements in terms of design and sound, but should also be shockproof so as not to harm a person visiting the consumer’s house. ‘Due care’ approach to serving the consumer interest is solidly based on several ethical perspectives, and enumerates that: (i) Manufacturers or dealers or agents have the duty to carefully examine the specific needs and expectations of a vulnerables (buying) party; (ii) Due care is based on the ethics of care, which makes it mandatory to fulfil the condition (i) such that selling and buying goods and services in marketplace becomes an explicit moral duty; and (iii) Due care is also in line with ‘rule utilitarianism’, and, if accepted and followed in marketing and selling, ensures the welfare and well-being of all. These enumerations of due care make the manufacturers responsible for: (a) designing the product or services using the latest technology to make the product less liable to harm or injury; (b) care and control during manufacturing with the help of known techniques and technology to prevent defects (or liability); and (c) information about product disclosures made with labels, notices or instructions on the product that warn consumers of dangers or precautions (if any) involved in usage. The due care view not only applies to manufacturing, but also to services. A classic case of due care in services was the recent directive of an Apex Consumer Court in India regarding the quality of potable water supplied by civic bodies (The Telegraph, Kolkata, 4 August 2008). In its directive, the court observed that it is the responsibility of the civic body of that regions to supply drinking water suitable for the civic population; citizens may claim compensation if they suffer due to poor quality water (causing diseases). Therefore, ethics in business and administration, and ethical responsibility for the consumers at large, are not only confined to business but are also concerned with civic administration and care, which are generally run by elected government administrative bodies. The due care view, therefore, seems to be the answer to today’s customer dominated markets where success of a business depends on customer satisfaction measures. However, it has few limitations as well. It is difficult to draw a line or quantify—when or how much ‘care’ is enough

Ethics in Business and Corporate Governance

—as the measures are mostly qualitative in nature. Also, it is not clear how far a manufacturer should go to determine the needs and requirements of a customer and what would really satisfy consumer needs and expectations. It may be that a manufacturer genuinely fails to discover the needs of a customer and sells him a product to the contrary. Generally, in a free market, customers make the buying decision based on the sellers’ description and information about the product. But, a customer may not be appreciative of all the information shared during the deal and may go by other reasons to buy sub-optimal goods—for which manufacturers often decline responsibility later. In such cases, although the consumer undoubtedly has the right to choose what he wants to buy, the due care approach obliges the seller to caution the buyer about product deficiency, if any. (iii) The Social Costs View This is another way to approach how manufacturers discharge their duties and responsibilities towards consumers and other public. According to the social costs view, a manufacturer should pay for any damage or injury sustained by a consumer or public owing to any defect in the product—despite the fact that the manufacturer had exercised all due care in the design and manufacture of the product, and had taken reasonable measures to warn users of any possible danger (in keeping with the due care approach). The aim of this approach to consumer protection is to ensure that manufacturer do not escape or evade their responsibility in the case of any harm or damage to consumers (arising from defective product), howsoever unforeseen it would have been at the start. This approach is also based on the ‘sellers take care’ doctrine and forms the basis of legal liability founded on utilitarian logic. Incidents of social costs are aplenty, especially in America and Europe where consumer protection laws are very harsh for ill-designed and badly manufactured products and the consequent product liability. Some such examples are: failure of safety mechanism in a car, accident inside aeroplane due to faulty design of interior utility space, malfunction in household appliances, etc.With increasing mechanisation and automation of products (goods and services), there is an urgent and critical need to safeguard consumers and society from possible damages and sufferings caused by product failure. Not only are marketing ethics more stringent in these countries, even the laws governing social justice are quite specific about dealing and estimating consequential damages.As a result of this approach, all manufacturers are extremely meticulous in designing their products and equally conscientious in marketing. However, very few developing economies can boast of such effective consumer protection laws and measures; hence, in less developed countries where the ‘social costs’ are relatively low, businesses or manufacturers tend to make certain compromises and adjustments while designing, manufacturing and marketing their products. For example, in India and other developing countries, car manufacturers can easily market even those models that do not have ‘minimum crash test’ safety or are not fitted with ‘airbags’ to protect the driver and passengers in the case of accident. This is a serious compromise, where car companies compromise passenger safety, due to the lacunae in laws and governance. Similarly, drugs manufacturers and marketers in India freely sell their products over-the-counter without adherence to safety standards. In all such cases, manufacturers are oblivious of their duties and responsibilities to the public and society. However, this situation is

Ethics in Marketing and Consumer Protection

rapidly changing in India, owing to increasing consumer awareness and stricter implementation of consumer protection laws. A case in point, discussed earlier in this chapter, is the judgment of a Delhi court favouring the victim of the faulty ‘power inverter’, ruling that the manufacturer pays compensation to the consumer. According to proponents of the social costs view, this social and consumer protection initiative will lead to more efficient product development and effective usage of society’s resources; hence, it will benefit business as well as consumers. Businesses will be forced to factor-in all actual and probable costs (including that incurred on product failures), thereby leaving no scope for any hidden costs or overpricing. This approach will also make manufacturers more careful in designing, manufacturing and marketing their products—to avoid the burden of failure and social costs—which will greatly motivate technological advancement and discovery. Furthermore, with the application of social costs, manufacturers will now distribute the cost —incurred on product development or defect elimination—to all consumers alike, through built-in pricing, without a few unfortunate consumers being burdened with these otherwise unexpected costs. Thus, this view lays overall importance on the utilitarian assumption that the society’s resources must be efficiently used or employed so as to secure maximum benefits for people. This approach leads to the charter that it is the manufacturers’ duty to protect the consumers and society from costs arising due to product defects or deficiencies, even in the absence of intentional negligence or contractual relationship (between manufacturers and consumers). But, is it all that fair to manufacturers who could not have foreseen the problems nor could have eliminated them from their products? Does the provision of social costs violate the basic rule of compensatory justice? Nonetheless, the utility of this view in protecting consumers from unforeseen damage or injury goes a long way in helping the society in broad terms; making the producers of goods and services a bit more mindful of ‘product effects and liability’; and promoting a business culture of sharing such costs with insurance or other fair methods rather than the affected consumer or society member having to suffer it alone.

5.5 MARKETING AND ETHICS Marketing ethics should be guided by the principles of ‘consumer protection’ as discussed in Sections 5.3 and 5.4 of this chapter. However, for a clear understanding of ethics vis-à-vis marketing, it is necessary to examine few market characteristics and how the rule of ethics can be effectively applied to those market situations. The primary characteristic of an organised and ‘free market’ is the presence of competition in the marketplace. Lack of competition or any anti-competitive elements posed by a few manufacturers would only encourage unethical marketing practices and violations of consumer protections duties. It may not be out of place to recall that towards the end of the 1990s, when steel prices were falling in India, news reports alleged ‘price carteling’9 by some leading steel producers in the country. 9

Carteling is collective price fixation, by which business enterprises restrain the growth of a competitive marketplace. Business associations such as those of the gas dealers, airline operators, brick factories, air travel syndicates, etc. either fix the rates or bottom line prices, and no one affiliated to the association dares to violate the rule. Refer to:;, accessed on 21 October 2011

Ethics in Business and Corporate Governance

economy of India, those companies were trying to avoid price competition by curtailing it, thereby depriving the consumers of the benefits of a free market. Instead, what was expected from such a market was value-addition to products and holding the price realisation level in a competitive marketplace. Since the opening up of the Indian market and the global economy, many regulatory measures like ‘competition law’, ‘anti-dumping law’, ‘law against restrictive trade practices’, etc. have been introduced to curtail or prevent such unethical marketing practices in order to protect the interests of the consumers and the nation. It must be appreciated that the key factor for a successful business is its ability to compete in the existing and emerging markets without recourse to any unfair, immoral and unethical actions. The moral aspects of a free market system call for the production and distribution of commodities in a way that are just, maximise utilisation of resources and money for real value creation, and maximise economic utility for consumers and society. As is pointed out in Sections 5.3 and 5.4 of this chapter, a true free market situation seldom exists. It is not uncommon that sometimes a few players in the market join hands, lobby to authorities, and use their combined power to fix prices or to ascertain the availability of a commodity or service. This is unethical marketing by any means and against any fair trade practice. Such situations exist not only in national level operations, but also in international trade where free market is distorted by the protectionist attitudes of giant multinationals or the ruling governments. An example of international trade carteling is the yet-to-be-resolved dispute of the Doha Agreement10 for free trade amongst nations; countries who are parties to this agreement are still defying and continuing with protectionist measures and anti-dumping laws. Instead of promoting and strengthening a free market and fair business practices, governments of these nations themselves are posing barriers to the actual implementation. Analyses of various WTO (World Trade Organisation) reports, such as the Doha Development Round10 and G-2011 meetings show that governments themselves fail to act fairly when it comes to trading with other countries. Thus, fair trade and truly ethical marketing practices are seldom observed in international business, even though all countries swear by ‘equal opportunity for growth’, ‘fair trade practice’, ‘customer satisfaction’ and ‘consumer protection’ in their mission for international trade and cooperation. It is generally believed that ethics are more closely adhered to in perfectly competitive markets, wherein no buyer or seller has the power to significantly influence prices or exchange mode at which goods are being exchanged (Figure 5.2 illustrates the typical ‘demand-supply’ curves). In such a demand-supply balanced market, buyers and sellers are equal in power to prevent or deny any force upon each other in terms of buying or selling. Another condition of such markets is the freedom from imposition of any external regulations on price, quality or quantity. However, such markets always witness ‘demand-supply’ equations to affix or contract the price and quality, which adversely affect the buyers and raise questions about marketplace ethics. 10, and, accessed on 29 October 2009, and, accessed on 29 October 2009 11, accessed on 29 October 2009, and, accessed on 12 October 2011

Ethics in Marketing and Consumer Protection High Demand

High Supply Surplus area



Prices per Ton (Rs.) 100

Profit Opportunity


Shortage area Low Supply

Low Demand Quantity Produced

Figure 5.2 A Schematic Demand and Supply Position with Effect on Prices and Profits [In this figure, E denotes equilibrium point where demand equals supply, and in this condition, seller and buyer are in equal advantage. But, for low supply, price will be pushed up allowing higher profit opportunity. Similarly, for high supply, price will be pushed down due to opportunity loss.]

Here, the ideal solution is to have a perfectly balanced and ‘equilibrium’ market where ‘every seller finds a willing buyer and every buyer finds a willing seller’. Only such a market condition will truly satisfy the ethical and moral criteria of justice, utility and rights. However, such an ideal market condition hardly ever exists because the market in general is moved by the ‘demand and supply gaps’. Conventional ‘supply-demand curves’ analyses predict that, in a perfectly balanced, free market situation, the prices, quantity supplied and quantity demanded all tend to move towards the equilibrium point where the deal would be fair to all. However, if the supply is less than the demand in the market, consumers will be willing to pay more to get the product (in short supply) and vice versa, i.e., pay less when the supply is more than the demand. And, very often, the market is dominated by imbalances of supply and demand — arising from natural distribution or artificially created crises — which provide opportunities for unequal bargaining power. In fact, many a time, the market is manipulated by the manufacturers’ lobby or body to create such situations for extra profit, and consumers have to pay more for goods and services made available under these market conditions. In developing economy, like India, such instances of manipulation in the marketplace are plenty, often leading to an inflationary trend in consumer goods pricing. An example at hand is the rise in steel prices in India, continuously during April—July 2008, although the country’s annual steel production exceeds its actual demand—thus, defying the ‘demand-supply’ rule. The reasons could be an increase in the country’s export (of steel) or decrease in imports or both, or it could even be some price cartel at work. In such cases, the government of some countries (as in India) tends to regulate or control the market price of such goods by curbing certain types of trading via special notification. This may be deemed as anti-free-market practice, but is necessary to protect the greater interests of consumers and the national economy. Thus, we come back to the concept of either self-regulating or getting a regulatory market-force to ensure ethical and moral rights, utility and justice for consumers. However, in this context of free market economy, it should be noted that ethics should not only be factored into the government’s economic policy (or measures), some other overriding factors

thics in Business and Corporate Governance

should also be considered for the overall improvement of the national economy and well-being of its population—both of which are subjects of micro and macro economic principles and practices. The greatest danger to consumer rights is the loss of free market and the emergence of a monopoly market, directly or indirectly. In the latter, a single seller controls the market demands and prevents new sellers to enter the market segment.The monopoly business or firm is, therefore, able to fix its output to less than the equilibrium amount and, thereby, create a very high demand situation that allows the firm to make an excessive profit (Figure 5.3 depicts a typical monopoly market condition). In fact, monopoly markets leave most consumers aggrieved and unfairly treated, though they would have little choice as consumers to go elsewhere, i.e., this market will promote unethical practices in the marketplace. If other manufacturers are allowed to enter and do business in this short-supply market, it would bring about a rise in supply and drop in prices. This, in turn, would allow the consumers to have fairer and more just deals. Many economies, especially the developing ones, try to regulate this monopoly market in a manner that restricts the opportunity to make very high profits and restores some fairness and justice in buying the concerned goods in a monopoly market. 500

Price 300




Operating area in monopoly market Shortage area

E Quantity Figure 5.3 Illustrative monopoly market condition where shortage is created by controlling quantity at a level less than E, the equilibrium quantity. The monopoly firm, however, has to calculate the price-amount ratio that will secure the highest profit under a given market condition.

In India, examples of such activities to protect consumer interest, especially in terms of prices, could be seen in the pre-economic-reform days of 1970s and 1980s when there were government control on prices and price escalations of certain utility products, like steel, automobiles, fertilisers, etc. The situation has now changed with the opening up of economy and globalisation—eradicating the era of totally monopoly market. However, in practice, many markets are now dominated by few big players, which are suspected to be causing some degree of distortion in the competitiveness of market structure. This is called oligopoly market condition, wherein players of a particular market segment often tend to fix process for profits by restraining competition amidst them. In India, this is seen in the steel and metal sectors where companies sometimes join hands and fix prices (to be charged to consumers) for higher profits. This is not an ethical marketing practice from the standpoint of consumer protection, although such a move could be justified from the company’s point of view of increasing EPS

Ethics in Marketing and Consumer Protection

(earning per share) or EVA (economic value addition). Many now believe that the derailment of business results and the global financial meltdown in late 2008 was brought about by the obsession with the practice of increasing the EVA at any cost as a means to grow and prosper. If companies are guided by the interests of shareholders alone (i.e., as if they were the only stakeholder in the company), then many unethical actions are triggered from time to time to keep the promoters and shareholders happy. Some typical actions of such unethical actions are: price fixing, manipulation of supply in the market, tying arrangements, retail price maintenance agreement, price discrimination, etc. None of these actions are acceptable as ethical; yet this type of ‘tying and doing’ business in an otherwise competitive and free market is evident the world over. This goes to show that companies need to have other social goals—and the right type of goals—to be fair and ethical in business. Another important market power that aims to protect consumers is the ‘antitrust’ view of business.12 As against monopoly or oligopoly market, this view implies the necessity for competition to protect the trust of consumers. The antitrust view opposes the concentration of business power through mergers and acquisitions, so that companies can exercise market dominance (e.g. power to decide prices, etc.) with immunity. Since the concentration of business power may not promote price or service competition in that market segment, it is likely to harm the interests of consumers at large. Antitrust view recommends breaking up of big companies into smaller units so as to promote competition amongst highly concentrated companies. For example, in the current Indian scenario, antitrust view can be applied to the telecommunication industry, where strong lobbies comprising few large companies control large bands of telecom spectra. The government is trying to break into this by allotting spectrum to other companies so as to promote competition in price and service quality so that, ultimately, consumers can benefit from this basic infrastructural facility. However, there are opposing views that large-sized and large-scale operations are more economical and beneficial for growth of the business—ultimately benefiting the consumers. Some even advocate effective regulations to control the market behaviour of such large companies without breaking them up and losing the advantage of scale of operations. In India, there are quite a few regulatory bodies—like the Company Law Board, Security Exchange Board of India, Foreign Direct Investment Board, etc.—which regularly examine such proposals (of business concentration through mergers and acquisitions) and examine the business as well as consumer-oriented aspects in these proposals. The antitrust policy seeks to promote price competition, high output, better efficiency and innovative approach to business. Owing to its merit and ethical character—in terms of consumer protection and balancing the market dynamics for growth—the antitrust mechanism in business regulation is being widely held as essential for ethics in marketplace. To summarise, the need for ethics in marketing and marketplace is beyond question; the question is, how can ethics be ensured and consumer interest be protected in the marketplace? There is no doubt that there are many internal and external factors that influence business behaviour; yet, modern business management theories place primary focus on consumer

12, accessed on 12 October 2011

Ethics in Business and Corporate Governance

protection and customer satisfaction for profit and sustained growth. Ironically, many a time, unfair and ambitious business goals or financial targets take the business away from the ethical path and behaviour in the marketplace. Hence, there is a need to regulate the business and the market for fair and ethical practices and, thereby, protect consumer interest. However, consumers are best protected in a truly free market situation, which seldom exists in its true spirit. A free and competitive market environment promotes fairer market practices and consumer care, where consumers can have their rightful choice. Today, most parts of the world are witnessing economic development by adopting the free market approach—thus lending those advantages to the consumers that they did not have earlier. In India, the evolution of retail chains and shopping malls and the growing consumerism are an example of how business and marketing strategies are re-orienting in an open and competitive market where consumers are getting better deals and the companies are also increasing their market-share and profit. As consumers press for wider choice, competitive prices, transparent dealings, and ethical practices in buying and selling, companies, especially the big ones, are evolving their own marketing strategies in the growing consumer dominated markets to make higher profits. Ethics are not against profit-making, but talk about the ways and means to make that profit; making higher profits and ethics (in marketing) are not necessarily contradictory to each other. The real challenge for a business is to grow in a competitive market by ethical means. This chapter, through various discussions and illustrations, shows that to make more and sustainable profits, a business has to earn the confidence of the consumers with an ethical work culture and transparent dealings. It is no wonder, therefore, that modern management systems place overwhelming emphasis on customer satisfaction and continuous improvement in business processes for success. Modern business treats customers and consumers as an integral part of the business, and most business strategies start with the planning of how to protect consumer interests and win customer confidence. This is evident in the practice of TQM, which has become an indispensable instrument for success in business in the present-day competitive market. TQM is totally focused on both, customer satisfaction and continuous improvement of products and services as a means to success in business. It is being adopted by one and all industries as a strategic tool in global competitive markets. Awakened by the success of TQM, in changing the face of business in a competitive market, management experts are now promoting TEP (total ethical practices), a concept in line with total quality practice. The aim of TEP is to restore the confidence of people in a business as an ethical institution, which has been regarded by modern society as an institution of economic well-being in a country. Restoration of the image of business as an ethical institution through TEP has become necessary due to some image loss in recent times due to the turmoil of economic meltdown and down-turn of business arising from many ethical lapses. Ideally, such a system (i.e. TEP) has to work on selfregulation rather than external regulation and control that we have been discussing so far in assuring ethics in business and marketing. Business enterprises have to be aware of their moral and ethical responsibilities, have to be self-regulating in their approach to setting business targets and goals, and have to be committed to the principles of ‘due care’ for consumer protection and ‘social cost’ to marketing by upholding the principle of covet vendor.

Ethics in Marketing and Consumer Protection



The biggest challenge to ethics in marketing comes not from competition in the market, but from the monopoly and monopolistic competition in the marketplace. Competition is the product of free market economy and is good for the overall health and growth of business; it is a positive development for business and encourages ‘fair play’ in the conduct of business and its governance. But, in reality, competition has been found to be breeding many unfair business practices to circumvent true competition. One such unfair business practice is monopoly. Monopoly refers to the situation where a single firm is the only player in a business segment, competition is nonexistent, and the power to dominate and manipulate the market is concentrated in a single firm. This closed system may result in the restrained product supply in the market and artificial high prices, harming the interests of consumers. The concept of ‘fair price’ for consumers or ‘fair return’ for investors—the principal purpose of corporate governance—gets lost under the monopolistic system of business. In fact, in today’s fiercely competitive market, there is hardly any ‘perfect competition’. Instead, we observe many business practices that prevent competition. Economists have termed these business practices as monopolistic competition, oligopoly, or monopoly. Through these practices, some business concerns try to dominate the market and maximise their market share and profits in an otherwise competitive market, thereby breeding unethical marketing practices. Under the monopolistic competition, many sellers offer differentiated products—products that differ slightly but serve similar purposes. By making consumers aware of product differences, sellers exert some control over price. This is evident in the present market of all consumer products, especially in electronic and entertainment business. In an oligopoly, a few sellers supply a sizable portion of products in the market, thereby exert some control over price. But as their products are similar, so when one company lowers prices, others follow. This is evident in the marketing of household goods and consumables. In a monopoly, there is only one seller in the market and the single seller is able to control prices. However, under the present economic system and marketing environment, true monopoly hardly exists; it shows up in two other forms: natural monopoly and legal monopoly. Natural monopolies include public utilities, such as electricity and gas suppliers.They inhibit competition, but they are legal because they are important to society and backed by the government policy. In exchange for the right to conduct business without competition, they are regulated by the government. For instance, they cannot charge whatever prices they want; they must adhere to government-controlled prices. As a rule, they’re required to serve all customers, even if doing so is not cost efficient.A legal monopoly arises when a company receives a patent or some intellectual rights, giving it exclusive use of an invented product or process for a limited time, generally twenty years or so. Such examples are prevalent in modern pharmaceutical industries. Now the question is how these variants of monopoly influence the marketing policy and ethics. In general, monopoly market practices are considered anti-competitive because they can form a cartel to fix or manipulate prices, can control supply, arrange tie-in schemes, or

Ethics in Business and Corporate Governance

anything that is against free market. Furthermore, monopolies foster distributive inefficiency, and the demands of customers or the society are not served well. Monopoly conditions remove competitive pressures. There is no urge to market value-added products or introduce technological competence to lower production costs. Finally, monopoly conditions do not safeguard well the economic liberty as is possible in an open competition environment. Because sellers are not free to enter the market, and buyers buy overpriced products under duress in the absence of alternative vendors.Thus a monopoly or its variants can cause market distortion and give rise to many ethical problems related to serving the consumer needs. Anti-competition or monopolistic business practices can have three concerns relating to governance and ethics, as described below: 1. Restriction of free trading and competition between businesses, including the repression of free trade caused by cartels. 2. Abusive and anti-consumer behaviour by a firm dominating a market or trying to take a dominant position in the market by anti-competitive practices. Anti-competitive practices may include predatory pricing, tying, price gouging, dumping, refusal to deal, etc. 3. Mergers and acquisitions of large corporations, including formation of joint ventures, by transactions that can threaten the competitive process. Competition and competitive marketing are essential for providing a fair market opportunity to customers and consumers. Any departure from this would not be good for consumer protection. Consumers would be losers in the absence of market competition. Monopolistic systems are also notorious for violation of ethics to retain market power and privileges. The system is contrary to innovation and product development—the backbone of modern day consumer-driven market and economic growth. Consider, for example, unique products like iPhone, iPad, Galaxy and other tablet phones and pads that are streaming into the market to consumers’ delight. These products evolved due to competition among electronic goods manufacturers supported by software developers. The world would have been a great loser (if not sufferer) without such communication devices that are so essential for modern living.These are no doubt products of competition and competition-led innovations. Thus, the absence of competition (i.e., the presence of monopoly) in a market is not fair to consumers and the society. Competition, which is the opposite of monopoly, is essential for consumer-friendly fair market practices, characterised by marketing ethics and drive for consumer protection. Monopoly, on the other hand, causes price rise, decrease in quality, and redundant products—all these go against the interests of consumers, a state responsibility for good governance. Monopolies lie at the other end of the spectrum of ‘fair business’ that perfect competition promotes. A perfectly competitive market should: (a) satisfy certain degree of fairness in pricing, (b) utilitarianism in demand and supply (by optimising distribution and use of resources and goods), (c) improve quality and value-chain, and (d) satisfy certain kinds of moral rights in buying and selling. Competition provides advantages to consumers—they get the opportunity to buy what they want, from whom they want, at a price they are willing to pay, and at conditions that assure intended uses and services. Thus, perfect competition blends fairness in the market, open

Ethics in Marketing and Consumer Protection

and transparent transactions, fair market opportunities, and healthy competition for innovative products and services. Any deviation from perfect competition—either by arrangement among marketers or backed by government policy—tilts the market unfavourably against the consumer interest and ethical business practices. Hence, there are laws and rules for protecting consumers and investors from possible abuses through monopolistic market conditions. Among these laws are ‘Competition Law’, ‘Anti-Trust Law’ and ‘Monopoly and Restrictive Trade Practices Act’. Conforming with these laws forms part of the legal, ethical and governance system in a country. Monopoly is not totally avoidable in a country, especially India where infrastructural projects like power, energy and few core sector industries are deliberately controlled through ‘public sectors’ in a near-monopolistic way, backed by the government policy. This situation also exists in many other developed countries, including USA, but to a limited extent. But, the issue about monopoly remains the same: Are they efficient to serve their stakeholders, fair in dealing with the customers, responsible in management? The argument that anti-competitive practices (like monopoly or oligopoly) have a negative effect on the economy arises from the belief that a freely functioning efficient market economy, composed of many market participants—each of which has limited market power—will not allow monopoly-like market manipulation to earn profits. As a consequence, in a market that is free of monopolistic practices (i.e., a competitive market), product prices will be lower, and the market behaviour will be more responsible and ethical to keep customers happy. However, it is also true that the marketplace realities are sometimes more complex and different than what theories of competition would suggest. For example, questions may arise: Who would invest in very large core sector projects in a developing economy, involving high risks to the huge capital investment? How can a business achieve economies of scale to remain effective and profitable in a developing market? How to attain levels of operational efficiency by technological and economic amalgamation that otherwise might not be easily possible to attain in a competitive market? There are undoubtedly industries (e.g., infrastructure projects, airlines and pharmaceuticals) in which the level of investment is so high that only extremely large firms, which are quasi-monopolies in some areas of their business operations, can survive. Many governments regard these market situations as natural monopolies. It is believed that the government’s inability to allow full competition in highly capital-intensive industries could be balanced by government regulations aimed at preventing these industries from exploiting the market opportunities at their will. Despite such controlling mechanisms, monopolistic businesses are often found to be flouting the laws and rules or functioning in a style as if they should not (or need not) be bound by any restraining regulations.This monopolistic behaviour is rooted in their feeling that they are entitled to their monopoly position in such businesses by fiat. This is true in case of large monopoly businesses in government-marked niche areas (e.g., gas supply and energy in India). Monopolies in a market can be established by the government policy (natural monopoly), by intellectual power (legal monopoly), for serving business interests of competitors (monopolistic competition), or by ‘mergers and acquisitions’ (M&A), a market opportunity-driven business strategy. In India, monopoly or near-monopoly was born in specific business areas,

Ethics in Business and Corporate Governance

backed by government policy, as a measure to drive growth in these areas such as power, energy, telecommunication and steel. However, since 1991 after liberalisation of the Indian economy, these monopolies are being gradually opened to private players. A monopoly is generally coercive and violative of ‘market ethics’, especially when it actively prohibits its competitors to enter the business by using unholy business alliances or by market or regulatory manipulations. Monopolies can act as business monsters, flouting rules, regulations and market ethics. Such a scene was evident in India prior to the economic liberalisation (especially in the 1960s through 1980s), when many dominant monopolistic businesses, based on the ‘licence and control’ regime, took the country for a ride by creating artificial shortages or underselling, selling sub-standards products, and not adequately protecting the users and consumers with services or warranty. Near-monopolistic or monopolistic industries in India prior to the economic liberalisation included automobile, telecommunication, power and energy. Though the picture has changed for better in India since the mid-1990s, history of these business segments prior to liberalisation provides examples of how damaging the monopoly or monopolistic competition could be by fostering distributive inefficiency, removing competitive pressures that ordinarily drive the business for increased productive and other operational efficiencies, and not safeguarding well the consumer interest and market liberty. Therefore, minimising monopolistic businesses and disciplining them (as regards ethics and governance) has been a challenge to governments and regulators. To rein in the monopolistic business that became prominent in India due to socio-economic compulsions, the government enacted the Monopolies and Restrictive Trade Practices (MRTP) Act in 1969.13 The MRTPAct deals with ‘monopolistic trade practices’, ‘unfair trade practices’ and ‘restrictive trade practices’. It defines what should constitute unfair practices in each of these fields. The Act established the Monopolies and Restrictive Practices Commission as an oversight and regulatory agency for ensuring equity and fairness in the marketplace. The MRTP Act aimed at preventing concentration of economic power and dominance in few hands to avoid damage to the consumer interest and market dynamics. The MRTP Act was further supported by The Competition Act, 2002 (amended in 2007) to regulate and restrict monopolies and unfair competition in business. Holding dominant position (e.g. RIL for gas and refinery business) or monopolising a market (e.g. Coal India Ltd.) is not considered illegal in itself. These are monopolies as sanctioned by the State to draw (or provide) investment in risky ventures or to enlarge domestic interest. Therefore, the issue of such ventures, which often dominates the market, is not the legality of their existence but ethics and fairness in their market behaviour and discipline in corporate governance practices, protecting the interests of all stakeholders. For this reason, most countries have ‘competition law14&15 and competition regulators to prevent anti-competitive practices. So deep is the spread of unfair practices indulged in by monopolistic businesses in many countries that most governments have enacted strict ‘anti-trust 13, and, accessed on 12 November 2011 14, accessed on 12 November 2011, accessed on 12 November 2011


Ethics in Marketing and Consumer Protection

laws’, ‘competition laws’ and ‘consumer protection laws’ control unfair trade practices. Notable regulators in India are SEBI, RBI, the Department of Commerce, the Department of Company Affairs different consumer councils and forums in addition to law courts. These regulators do not aim to restrict or curtail market opportunities; they aim to create an atmosphere of positive competition in the country, which is fair and moral to all concerned. Managing competition or monopoly calls for lending positivism to business processes and competition, ethical understanding of the market, and strong consumer protection laws in the country to solve problems arising out of market dynamics and forces of competition. Cartelling or collaborative-marketing—a character exhibited by organisations with non-competing attitude—does not spell good standards of ethics or governance. A recent study undertaken by the American Antitrust Institute16, a think tank based in Washington DC, concluded that competition laws and policies play a small role in business ethics if the ethical management of competition is not appreciated or integrated in the corporate governance strategy. The study recommends the need of, what it calls, ‘ethics of competitive strategy’ for ethical decision-making in dynamic and innovative market conditions. This is a reminder that it is not the type of business—monopoly or otherwise—that can herald ethics in business; it is the wisdom and will of the corporate bodies to integrate the strategy of ‘ethics in managing the competitions in the marketplace’. The best way to address the marketing issues of any business is the ethical way that connects the ‘customers–business– society’ in a bond of ‘growth and sustenance’ for each other. The marketing strategy and ethics are not separate; ethics stand as the reinforcing bars of a strategy—comparable to the concrete beams supporting a building. Better we weave them together, better would be the strength of the strategy—be that for managing or governing a competitive business or a monopolistic business. Ethics do not choose between ‘black and white knights’ or between ‘competitive and monopolistic businesses’. Both types of business have to follow same rules of ethics and same goal to reach—that is sustainable growth.

5.7 ETHICAL ISSUES IN INTERNET MARKETING As stated earlier, a very fast growing area of marketing is the Internet marketing where goods and services are offered on the Web.The Web-hosted domains advertise and describe the products or services and offer terms of sale or use to public at large. But, the system is ‘faceless’. It carries out transactions by ‘routing through invisible electronic communication channels’, that is, data and money for transactions in goods described on a company’s website is transferred electronically. The Internet has become an essential means for communication and transactions—both commercial and social—in modern business and society. But the Internet-based marketing raises the question about the transparency of information, moral and legal responsibility of the offers, mechanism of consumer or customer protection, and quality of regulatory controls. The Internet-based marketing system process could be open to fraud, violation of legal limits and ethical responsibility, as the system is faceless and driven by the motive of earning ‘easy money’ 16

‘Dynamic Competition and Business Ethics’, Journal of Business Ethics, Vol. 50, Issue 2, 2004; Refer to =afficheN&cpsidt=15676032, accessed on 6 September 2009 and 11 November 2011

Ethics in Business and Corporate Governance

by facilitating maximum reach to the market with minimal commitment to buyers. In this system, buyers are just a set of data rather than customers in real sense of the term. As is evident from Case II, described at the beginning of the chapter, the ethics violation in such faceless marketing system is very high, especially due to the extreme flexibility and manipulation-prone nature of the Internet-based transaction processes. The Internet-based mass market frauds cited earlier under footnote 1b are the examples of legal and ethical violations perpetrated through Internet marketing. Ethics foster a relationship based on moral behaviour between two or more parties, agencies or entities, who stand to gain either by getting protected from harm or by benefitting from the exhibited moral standard or behaviour. The strength of morality-based relationship lies in understanding each other’s needs and concerns, which is the binding force of ethics in marketing. This ethical bond is apparently absent in the faceless Internet marketing. Such a situation makes the Internet a vulnerable and non-transparent place for marketing where the buyer-seller relationship could not be trusted blindly. Because the claims made about the quality of goods and services offered on a company’s website could not be easily verified. Therefore, this source of marketing often comes under serious scrutiny for legality as well as for ethics. This, however, does not mean that the present social and economic order can (or should) bypass this source of marketing. The Internet marketing is here to stay with us for long and grow. The challenge is how to make this important and emerging medium of doing business transparent and trustworthy, which is consistent with the moral principles of ‘telling truth’ and ‘doing no harm to others’. In the 21st century, we are in an ever-changing realm of technological developments and their applications. The Internet marketing is an important part of this realm. The Internet marketing is conducted in many forms, for example, simple E-mail marketing, mobile marketing, Web-based search engines for advertisement, brand building, product promotion and product selling, social media marketing for reaching out to special social segments of customers and acquiring new business, business-to-business (B2B) transactions, business-to-clients (B2C) transactions and e-commerce. The scope and opportunity is vast. But is the Internet marketing well regulated, well conducted, self-disciplined or always well intended? The answer is no, as is apparent from the large number of complaints of cheating and frauds being registered daily by the authorities of cyber crime departments.17 The problem is more acute with the advertising and marketing domains hosted by individuals or small ‘one-time’ groups, and mobile or e-mail based marketing. The ethics scenario in case of company-hosted B2B or B2C is not grim, as there is a good degree of trust and responsibility between the companies or parties doing these transactions. Their processes are more regulated by laws though there are still security and privacy concerns associated with e-commerce. But, a major challenge to ethics comes from websites and domains hosted by individuals or small groups to exploit the benefits of the Internet to serve their nefarious ends.The violation of ethics by these entities occurs in various forms such as disregard

17, accessed on 20 October 2011

Ethics in Marketing and Consumer Protection

of social contact protocol and privacy in wireless transmission of mails from cell phones and other communication devices, penetration of unsolicited visual advertisements and objectionable videos for exploiting the children and young, and duping the seniors with false promises. The Internet’s colossus marketing power will affect more and more lives than ever before, mostly benefitting the society and the business at large. But the Internet benefits bring with them serious threats to privacy, security, stability and safety of the society as well as of users. Because the Internet tools developed for faster communication in social and business domains are being increasingly used for data thefts, crimes of international magnitude, terrorism and smuggling, imitating and infringing copyrights and alluring and defrauding masses. Unscrupulous people misguide the Net surfers by posting misleading information on the Internet or lead them to dubious search engines to serve their ulterior motives. These means are being increasingly adopted globally as methods of marketing with the objective of either promoting fake business or for earning quick bucks. Therefore, a big chunk of Internet marketing methods are questionable on the grounds of legality and ethics. For buyers, the best safeguard against online duping centres on the doctrine of caveat emptor. The basic premise of this legal doctrine is that buyers beware of what they are buying, that is, buyers buy things at their own risk. In other words, it is the buyer’s responsibility to make sure that the product or service being bought on the Internet suits his/her needs and that he/she has checked the product or service for defects or deficiencies. But, does the online purchasing affords the opportunity for prior checking of a product or service? Or, does the product or service come with a built-in vendor return policy or warranty settlement scheme? Is the process transparent enough to allow the buyer to know that the terms of purchase meet his/her needs? Internet marketing methods should satisfy these queries of legal provisions, if the marketing methods are to be considered legally correct. Like traditional marketers, Internet marketers have to accept the responsibility for the consequences of their activities. They must make every effort to ensure that their decisions, choice of actions and recommendations actually serve and satisfy all relevant private and public bodies: the buyers, users, organisations, governments and the society. Ethics is about being fair and just, and morally responsible for one’s actions and their effects. And, ethical means being transparent in deals, right in decision and action, and not causing or being responsible to cause any harm to others.Therefore, ethics in Internet marketing, which is a public domain, have to fulfil these aspects of ethical and moral responsibility in communications, transactions and deals. Aspects of ethics and ethical issues in computer and information technology have been discussed in detail in Chapter 8 under the contemporary developments. The aim of present deliberations is to highlight special nature of Internet marketing and ethical responsibility therein. For Internet marketing personnel, the code of ethics recommended by American Marketing Association (AMA)18 and the Australian e-Marketing code of practices19 could act as guiding principles.The important points of the AMA recommendations on Internet marketing ethics are grouped under four headings, as described below: 18

AMA Code of Ethics:, accessed on 20 January 2011, accessed on 20 October 2011


Ethics in Business and Corporate Governance

1. General Responsibilities: • Compliance with professional ethics of marketing: avoiding harm by protecting rights to privacy, causing no harm knowingly, and caring for customers. • Adherence to all applicable laws and regulations to ensure that Internet marketing is not illegal in any way. • Honesty, fairness and transparency in dealings and deals, and taking moral responsibility for actions. • Respect to the rights and duties of parties involved in marketing transactions. • Disclosure of risks and responsibilities in the uses of products and services being marketed online. • Organisational commitment to ethical Internet practices and communication of ethical codes to all concerned with Internet marketing on behalf of a company. 2. Privacy: The information collected from customers should be confidential and used only for expressed purposes. All data, especially confidential customer data, should be safeguarded against unauthorised access. The expressed wishes of others should be respected with regard to the receipt of unsolicited e-mail messages. 3. Ownership: The information obtained from Internet sources should be properly authorised and documented. The information ownership should be safeguarded and respected. Internet marketers should respect the integrity and ownership of computer and network systems. 4. Access: Internet marketers should treat access to accounts, passwords and other information as confidential, and only examine or disclose such content when authorised by a responsible party. The integrity of others’ information systems should be respected with regard to placement of information, advertising or messages. Despite these codes, Internet marketing is fraught with the danger of losing personal data and privacy, scams and exploitations, unsolicited illegal business proposals and offers, and

Competition in the Market

Consumer Preferences

Ethics Policy of the Company

Figure 5.4 Drivers of ‘Ethics in Marketing’

Ethics and Moral Standards of Marketing Personnel

Ethicality of Marketing Targets

= Ethics in Marketing

Ethics in Marketing and Consumer Protection

marketing of harmful and indecent products and services. However, it is strongly felt that codes and regulations alone cannot prevent frauds and scams on the Internet. What more is required is the ethical self-regulation by the marketers, the discretion exercised by the buyers, and the technological deterrents of Internet misuse. The growing reach and expansion of the Internet has been throwing up many challenges to the society.To cope with these challenges successfully, we need to fall back upon ethics and ethical standards. Figure 5.4 illustrates the factors in the build-up of ‘ethics in marketing’.

Summary 1. Various discussions and illustrations in this chapter highlight the sources of ethical issues in marketing, needs and means for dealing with them, especially for consumer protection, and describe some approaches to consumer protection from ethical standpoints and justifications. The focus of discussions is to establish the need and necessity of ethics in marketing, not only for serving the consumers but also for ensuring the achievement of the very purpose of business, which is profitability and sustainability, by balancing ‘profitability’ with ‘morality’ of actions. 2. The chapter highlights various ethical issues of marketing and elaborates the special nature of consumers. The consumer needs and the ethical responsibility of marketing for protecting the consumer interest vis-à-vis the market environment have been discussed. It highlights the basic consumer protection approaches, their intrinsic merits, and how business can fulfil those responsibilities and marketing obligations. 3. What has been continuously emphasised in this chapter is that protecting consumer interests and satisfying customer needs makes the best business sense in an open and competitive market. It has been shown that ethics and ethical standards in business dealings, especially in marketing, are the most effective means of ensuring customer confidence and consumer protection. On the other hand, gaining market penetration and making profit by any means is neither good governance nor ethical. 4. Marketers have the responsibility towards customers to protect them from deceit and harmful effects of the products and merchandise they market. Marketing practices should adhere to the norm of faithful ‘disclosure’ about the quality, quantity and character of the product. 5. If ethics have to be deep-rooted in the company’s business practice, its marketing has to play a more effective role than what our present experiences show. Since marketing personnel are in direct contact with the consumers, they are in a better position to know customer needs and demands, and can enforce ethical conduct of business by interfacing between the company’s management and its consumers. 6. The ethical goal of marketing should be to protect the interests of customers. Marketers must appreciate that their interest in consumer protection is reciprocal to the well-being of their companies and themselves. Ethics in the marketplace, reflected in the marketing and servicing personnel or the organisation itself (in producing, selling and protecting the consumers) are as important as ethics within and inside the organisation. 7. If marketing does not follow or adhere to ethics and ethical standards of dealings, all the benefits of ethics in the company’s internal processes and governance will come to mean nothing.

Ethics in Business and Corporate Governance

8. In a free market, consumers are the principal factor that determines what to market, how, where and at what price; but, such consumers must be able to identify what to buy and use. 9. The chapter lends an insight into general approaches to consumer protection, their merits and benefits with regard to consumer rights and manufacturers’ responsibilities. In this context, ‘contract’, ‘due care’ and ‘social costs’ views have been discussed to show that modern business philosophy needs to adopt more from the due care and social costs approaches to effectively protect consumers from the ills of self-serving markets with unfair and unrealistic goals and financial targets. 10. The contract view is no doubt a basic approach to the marketing of goods and merchandise, but that alone cannot win the confidence and satisfaction of consumers. This point has been illustrated with few examples and modern marketing trends. 11. The ethical necessity in the marketing practice, including Internet marketing, has been outlined and critically discussed. Ethical issues of free market conditions vis-à-vis market moved by the demand–supply gap have been discussed. Various forces that control the market and ethical imperatives have been highlighted. Characteristics of Internet marketing—an emerging force in modern markets—have also been discussed and its ethical responsibility highlighted. 12. The other driver for marketing ethics (or lapses of ethics) is the market competition. Today’s marketing is more about managing competition than selling products and services.The compulsion of managing competition in the marketplace is giving rise to many unethical marketing practices. Competition is an outcome of free market economy. Therefore, competition should be viewed as a positive force of business. A perfectly competitive market should satisfy: (a) certain degree of fairness in pricing, (b)satisfy utilitarianism in demand and supply (by optimising distribution and use of resources and goods), and (c) satisfy certain kinds of moral rights in buying and selling. The role of ethics in competition management is to ensure that these characters of competitive market are honoured and respected and thereby ensure market leadership in the respective field of business. In view of these moral and ethical stands, the influence of monopoly, monopolistic competition and other variants of monopoly on the market and marketing issues have been discussed. It has been concluded that it is not the type of business—monopoly or otherwise— that can herald ethics in business; it is the wisdom and will of the corporate bodies to integrate the strategy of ‘ethics in managing competitions in the marketplace’. The best way to address the marketing issues of any business is the ethical way that connects the ‘customers–business– society’ in a bond of ‘growth and sustenance’ for each other. The marketing strategy and ethics are not separate; ethics stand as the reinforcing bars of a strategy—comparable to the concrete beams supporting a building. Better we weave them together, better would be the strength of the strategy—be that for managing or governing a competitive business or a monopolistic business. Ethics do not choose between ‘black and white knights’ or between ‘competitive and monopolistic businesses’. Both types of business have to follow same rules of ethics and same goal to reach—that is sustainable growth.

Key Words and Concepts Consumers, marketing, ethics in the marketplace, voice of customers, consumer protection, manufacturing, contract view, due care view, social costs view, reliability, maintainability, safety, consumer services, relationship of dependence, demand and supply gap, equilibrium market, monopoly market, utilitarian

Ethics in Marketing and Consumer Protection

logic, oligopoly market condition, earning per share, economic value addition, competition law, antidumping law, law against restrictive trade practices,TQM,TEP, social cost, covet vendor, free market, free trade, Doha Trade Agreement, WTO, self-regulation, antitrust view of business, competition, total ethical practice, ethics of marketplace, marketing ethics in monopoly and monopolistic competition, oligopoly.

Exercises Check Your Progress 1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

Marketers have the responsibility to protect consumers ___________ Rules, regulations and laws are external to an individual, but ethics and morality are ___________ The main driver of ethical behaviour in a free market is ___________ The main driver of the concept ‘rational utility maximisers’ is ___________ As per the ‘contract view’ of business, the relationship between customer and supplier is ___________ Ethical principles of business demand that manufacturers or sellers are duty-bound to ___________ ‘Social costs view’ holds that ___________ It is believed that ethics more closely adhere to ___________ markets. The aim of ethics in marketing is to balance between ___________ Competition is the product of ___________

Review Questions 1. Critically discuss the view that ‘a marketing person’s job is not to care for the customer, but to increase market-share and profits’. 2. Discuss the importance of ethics in the marketplace with reference to a few illustrative cases. 3. Outline the ethical responsibility of a marketing person in marketing consumable products. 4. List out the characteristics of a free market, and discuss why it favours consumers in protecting their rights. Is India a free market economy? 5. Critically discuss the merits and limitations of the ‘contract view’ approach to consumer protection and the marketing responsibility thereof. 6. If you were made responsible for consumer protection in the marketing of a consumer durable product, then what would be your strategic approaches to ensure consumer care and to win customer confidence in the marketplace? 7. Discuss the characteristics of a perfectly competitive market and its merits for protecting consumer interest. How can marketers manipulate a competitive market, to the disadvantages of consumers? 8. ‘Making higher profits and ethics in marketing are not necessarily contrary to each other.’ Discuss a marketing strategy in any area of product category that supports this view. 9. Briefly discuss the concepts of: ‘antitrust’, ‘covet vendor’, and ‘anti-dumping duty’ in relation to consumer protection mechanisms. 10. ‘Today’s marketing is more about managing competition than selling products and services’. Critically discuss this statement and establish how ethics can help in managing competition. 11. Critically discuss the ethical issues of the monopolistic market and suggest ways to balance ethics with business objectives in the monopolistic market.

Ethics in Business and Corporate Governance

Further/Suggested Reading Practical Ethics (2nd ed.), Peter Singer, Cambridge University Press, Cambridge, 1993 Business Ethics, Thomas M. Garrett, Prentice-Hall, Englewood Cliffs, 1986 Marketing Management (Millennium Ed.), Philip Kotler, Prentice Hall, Upper Saddle River, 2000 Business Ethics — Critical Perspective on Business and Management, Alan R. Malachowski (Ed.), Taylor & Francis, London, 2001 5. Total Quality Management — Principles and Practice, S.K. Mandal,Vikas Publishing House, New Delhi, 2005 6. Economics, Ethics and the Market: Introduction and Applications, John J. Graafland, Routledge, New York, 2007 1. 2. 3. 4.

7. Business Ethics: Concepts and Cases (Ch. 4), Manuel G.Velasquez, Pearson Education, Asia, 2002

CHAPTER 6 Chapter Objectives

Professional Ethics To highlight the importance of professional ethics in business and society To describe the role and responsibility of professionals in the society and business To illustrate the hazards of ethical failures in profession, business and society To discuss ways and means of regulating and promoting professional ethics To highlight the dependence of social well-being on professional ethics and moral standards

Ethics in Business and Corporate Governance

INTRODUCTION ance ern ce Gov ernan ate Gov nance por Cor orate over nce and Corp ate G erna s ov d nce or nes usi ess an Corp ate G erna B or n d p in Gov usi an ics B ness nd Cor orate Eth ics in usi orp sa Eth s in B usines and C ic s B Eth ics in usines th B E s in ic Eth

1a, accessed on 22 November 2011 1b, and, accessed on 13 October 2011

Professional Ethics

The two cases highlight two issues: (a) professional practices are not transparent and they are open to malpractices; and (b) there is an urgent need for reinforcing existing laws and regulations to protect the public and investors from possible loss and harm from dubious professional activities. To recall the case of the celebrity endorsement of a brand of cold drink made by an MNC in India (refer to Chapter 1), the celebrity endorsed the product for a huge sum, despite having information about the alleged pesticide content in the product and its ill-effects on the health of children. This was judged as immoral, because the celebrity did not follow the generally accepted moral standards expected of his position that called for the full knowledge and understanding of the product and the consequences of its use. Apparently, the celebrity compromised his or her position for monetary gain, neglecting to consider the damage to society. This is considered morally wrong and unbecoming of a celebrity position, which includes professionals such as actors, writers, artists, etc. who are expected not to act exclusively for personal financial gains but to also act responsibly for the well-being of the society. Financial wrongdoings by accounts professionals were at the root of the Enron scandal in the US as well as the Satyam scam in India (refer to Chapter 4, Case I). Accountants and auditors, in both cases, had compromised their positions by not checking the validity of financial data claimed to have been provided to them by the respective managements, which, in turn, helped the companies to fudge their accounts. It is immaterial if their actions were intentional or out of neglect; the fact remains that they failed to perform their moral and professional duties. Ethically, a celebrity or a professional cannot exploit his or her privileged position or neglect moral and professional responsibility. Figure 6.1 illustrates the flow of ethical responsibility of professionals for the society, consumers, business, profession and the government. 2 =english-skin-custom, accessed on 13 October 2011, and, accessed on 13 October 2011

Ethics in Business and Corporate Governance Ethical Responsibility of Professionals Professional codes & conducts–as prescribed by the respective organisation and institutions

Regulatory restrictions and disciplines

To: Business, Profession and Government Holding to the principles of business ethics

Holding to professional integrity

Holding to professional ‘codes of conducts’

Conforming to Self-regulation as per call of the government rules profession and regulations and nation

To: Society, Individuals and the Customers Keep upto ethical standards of the society and locality

Respect to social and environmental rights

Protect individuals & Self-regulation as per call of the duty and customers from harm ethical responsibility and harassment

Figure 6.1 Flow of Ethical Responsibility of Professionals for the Society, Customers, Business, Profession and the Government

Many may claim that such ethical issues in professional activities can be best served by self-regulation—in terms of what is right or wrong—as is the practice in many professions such as finance, medicine, legal and advertising. This approach, advocated earlier in this book, is a measure to protect the society from unethical professional activities that have always existed. Yet, self-regulation has prevented neither accounting nor medical malpractices (especially in India)—caused by professional negligence or fraud.While several explanations and pleas of ignorance came forth after the scam and the consequent damage had been discovered, but such malpractices continuing unabated till date. Arthur Anderson (auditors to Enron) said to US congressional committee that Enron had not given them the complete information and so its auditors had missed the large-scale manipulation of Enron’s profits over the years. Price Waterhouse Coopers (auditors to Satyam) had similarly cited the unreliable information provided by the Satyam management. What either party had overlooked was that each had failed to do its moral and professional duties that called for checking and truthfully certifying the audited accounts, so as to protect investors and stakeholders from any misinformation and damage to their interests. They had been paid for this job, and neglecting or failing to do that job is a moral failure. Hence, they were guilty of professional misconduct and negligence. They have failed to adhere to their moral responsibility and duty—to prevent financial wrongdoings in the company—for which they had been appointed and paid. At the G-20 meeting3 of world financial powers in London in 2009, world leaders advocated stronger regulations and concerted efforts by all countries to prevent future financial misadventures and economic crises.Today India 3, accessed on 13 October 2011

Professional Ethics

is a strong economic force in the world but has weak regulatory control over its financial market and business—which explains its stock market and financial scams at regular intervals. Ironically, in India, the rules hitherto allow penalties levied only on individual members of a profession and not on the company that employs them and colludes for the fraud. Reinforcement of rules and regulations, as mentioned early in this chapter, are perhaps a belated attempt in India to create more deterrents for companies which force their professionals, or for professionals who willingly collude with their companies, to commit the fraud or wrongdoing. What can be concluded from the recent cases of fraud is that, in order to stop financial crimes, professionals responsible for checking the rightness of actions must be self-motivated and self-regulated to stop frauds. This is where education about ethics and ethical codes of professional bodies can help. Financial crimes and wrongdoings in business hit the market and investors the hardest. Hence, the conduct of (accounting) professionals gets the highest priority in discussions on professional ethics. However, in modern society, advertising and media reporting also play very powerful roles in shaping marketing opportunities, consumer buying, social behaviour and attitudes. This necessitates a closer look into the way business is holding on to ethical standards, and enforcing regulations to control the damages arising from the unethical behaviour of these professions and professionals.This chapter attempts to highlight the duties and responsibilities of professionals and the necessity for professional ethics for the healthy growth of business. For the sake of clarity, ethics of individual professions have been discussed with reference to the code of ethics and conduct of the profession as prescribed by the governing and regulating bodies, like the ICAI, Indian Medical Association, Institution of Engineers (India), etc. Areas of professional ethics have been chosen by considering the spread of activities in an organised business, such as finance and accounting, advertising, marketing, human resource management, production and product management, etc. Professional ethics of the emerging market and media, which are assuming greater importance in this age of electronic information and communication, have also been included to make the chapter more comprehensive. In this context, ethics of individuals (some of whom may be professionals) in a business have been discussed in Chapter 4. The rules and principles of individual ethics are equally applicable to all professionals in general, because, in an organisation, professionals are individuals first and then professionals. What this chapter intends to discuss is the role and responsibility of professionals, in specific functional areas, with a view to maintain ethics in their respective fields of activities. Comprehensive discussions on ‘professional ethics’ covering all professions are not within the scope of this book, which primarily intends to introduce the concept and role of ethics in business practices and governance. Nonetheless, the impact of ‘professional ethics’ on business is so overwhelming that it cannot be totally overlooked here. Hence, discussions on professional ethics of some important areas of business have been included to aid the understanding of roles and responsibilities of professionals in maintaining moral standards in professions, business and governance.

Ethics in Business and Corporate Governance

6.1 INTRODUCTION TO PROFESSIONAL ETHICS Professional ethics refer to the moral standards demonstrated by the professionals working in the business of managing, promoting, marketing or developing (products). Not all professionals work in business or business related activities; there are many recognised professionals in society—Chartered Accountants, lawyers, doctors, actors, reporters, etc.—who more often than not work in their individual capacities. Wherever they may work, and in whatever capacity, the morality of their actions and behaviour has a profound impact on the well-being of the society—business being a part of it. And, just as the presence of moral standards and ethical sense in their work can benefit the community, business and the society, similarly, absence of the same can also harm society. To safeguard against this possibility, the society and the concerned government are careful to regulate and modulate the behaviour of professionals—with the laws of the land and the rules and regulations of various professional bodies—with the intent to promote fair practices and moral standards in professional behaviour. In today’s scientific approach to management, professionals are generally considered the backbone of business and industries; they lead the way strategies are formulated and business is conducted. If the involved professionals are honest, moral, respectful to human values, and courageous in standing against any wrongdoing, businesses automatically become ethical and true to meeting their social responsibility and obligations. While the concept of standards of behaviour expected from the professionals in a society is age-old, the necessity to reaffirm the principles of moral conduct in their behaviour has gained importance in today’s larger context of business relationships, global economy, communication, and migration of people from one part of the world to another. In the business world, professional ethics hold more focus and attention than ever before—especially in view of the series of business scandals referred to in earlier chapters. Awakened by their impact and the roles of professionals therein, governments, regulators and professional institutions the world over have become more aware about the necessity of introducing stricter ethical standards in the functional areas of various professions. While the impact of the numerous ethical violations and infringements of moral duties and rights in all professions all over the world in the past remained mostly localised, it is now affecting lives in other nations with economic globalisation, free trade, and revolution in electronic media linking the financial and economic systems of different countries. For example, the aftermath of the subprime crises in the field of housing mortgages that began the financial meltdown in USA and Europe in 2008, soon engulfed many other countries in other parts of the world, like India and China, and put them into great economic difficulties. In fact, the world economy is still reeling in the aftermath of an economic downturn which was largely believed to be the creation of bankers and finance professionals— given their greed and reckless business strategies (to make a quick buck as it were), overlooking their moral responsibilities towards the investing public and society at large. In India, there have been two directions to remedy the damage: (i) the government and regulatory authorities (SEBI, RBI, Department of Company Affairs, etc.) enacting new laws and reinforcing existing laws and procedures, on the one hand; and (ii) the professional establishments and institutions (IMA, ICAI, Institution of Engineers (India), etc.), under which

Professional Ethics

professionals conduct their respective practices, incorporating minimum ethical standards for their members. However, for regulatory measures to be effective, the control of monitoring regulators is necessary in promoting and administering ethics in professional activities and the commitments of doers (professionals) to ethics. This is a difficult task when one considers the bias and political nature of human beings; not surprisingly, in India there is practically no instance of professionals being hauled up and punished for their wrongdoings, or of legal testimonies against fellow professionals. Though standards and rules of many professional bodies have legal sanction, very few individual professionals have been punished for carelessness, involvement or abetment in a fraud. Hence, many feel that it is not the acts and regulations that are effective in inculcating professional ethics and standards of behaviour in professionals, there has to be a change of heart and attitude in individuals—something that can be brought about by ensuring that ethics is a part of the academic programmes of professional institutes. To make the society ethical, individuals have to be moral and value abiding; when individuals are wiser about ethics and their effect on society and business, self-regulation in professional activities becomes easier. To maintain ethics in professional activities and services, there is no better regulation than what can be exercised by professionals themselves; this is self-checking and self-correcting on real-time basis—with a consciousness of what is wrong and right, what is moral and fair. In our earlier discussions, we have seen how at times an organisation itself forces individuals (in this case, professionals) to do what is unethical or immoral. For instance, if the top executive wishes to manipulate the company’s accounts, individuals may not be able to stand up to the pressure—though a professional can rightly refuse participation in that unethical work. Individuals mostly succumb to or willingly work under pressure from the top management in such situations (like at Enron or Satyam). Therefore, managing professional ethics is not only the concern of individual professionals or professional bodies, but also of the organisations as represented by its top management. For professionals to be ethical, organisations must provide them with an honest work environment and ethical working platform. Organisations must hold on to principles of business ethics and demand ethics in the professional discharge of the duties of their managers. In the Enron case, the company had wilfully misrepresented its financial report through ‘creative accounting’ with the help of its auditors who were supposed to prevent such misrepresentation. In the Harshad Mehta-led stock market scam4 of 1992, which rocked and plunged the Indian stock market into a long gloom and recession, it was also observed that many members of the top management of several companies and financial institutions were involved and had willingly joined hands with the fraudsters to manipulate the stock prices. In both these cases, organisations (as represented by their top managements) had been the root-cause for ethical misconduct and fraud. One of the objectives of the study of business ethics as subject in academics would be to embolden professionals by imparting knowledge about moral principles, moral reasoning, moral rights, and morality of actions and behaviour necessary for the well-being of society, business and self. Throughout the history of social development, every society depended on the high moral standards of individuals, professionals, philosophers and artists who stood up against the many odds and adversities of 4, accessed on 13 October 2011

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their time to take the society forward. Similarly, modern society expects its professionals to stand up to the odd pressures—perhaps of different kinds—and hold on to high moral standards in their professional discharge of duties. Many past and recent happenings in the business world and their impact on the nations’ economy and society establish beyond doubt that professional ethics is crucial for the sustained growth of business and society anywhere in the world. The involvement of professionals and the role of professions is overwhelming in business; not restricted to direct functional areas alone, it spans areas such as accounting, finance, product engineering and development, HRM and marketing. Moreover, professional expertise and professionalism in running a business are also required in all related fields (such as legal, advertising, publicity, etc.). And, since business is a socio-economic institution, business and business environment are greatly influenced by the overall professional behaviour in the country, including media reporting and editing.This chapter, therefore, proposes to discuss some specific issues and guidelines of professional ethics in relation to the functional areas of business as well as other supporting professions (like advertising, media reporting, legal, medical, etc.), which are a part and parcel of total business environment and opportunities.

6.2 ETHICS IN PRODUCTION AND PRODUCT MANAGEMENT Production management comprises supervising and managing a set of predetermined processes and activities, being carried out by people with the help of certain tools and equipment, for the outcome of some marketable products. In such a set-up, there are two sets of ethical issues: (i) ethics relating to the conduct of the process where people are involved in working with machines or equipment in a given environment; and (ii) ethics about the uses and utility of the products concerned. Since production management is a professional discipline with specialised knowledge and skills, it would be worthwhile to discuss these ethical issues under professional ethics. With reference to the former ethical issue, ethics in production management, therefore, include care about safety, health hazard, reliability, pollution, contamination, adulteration, waste generation, etc., while the latter ethical issue implies that management is ethically duty-bound to ensure that the production process and the product does not cause any harm to the employees, consumers or the locality (in the way of environmental pollution, health hazards, danger in handling, safety, consumptions, utility etc.). Therefore, it is necessary that professionals engaged in managing product development, product design, process planning and environment control are (made) aware of the shortcomings of their processes and products with regard to safety in use and practice, health hazard in the process and handling, need for pollution control, environmental damage, utility value, etc. while discharging their duties and responsibilities. Important production related ethical areas are: (a) defectives, adulteration and inherently addictive/dangerous products for use and safety of the consumers (refer to Case I in Chapter 5); (b) pollution, emission and dust generation in the production processes; and (c) ethical problems arising from new technology (e.g. genetically modified foods, seeds, etc.).There is always the possibility of some danger of defect or deficiency in any product or production process—and it may be difficult to define the degree of permissibility in all such cases—but the principle of ethics demands that it should not be intentional. In other words, the

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organisation, its management or its professionals should not act with the prior knowledge of that defect being harmful to health, hygiene or safety of the consumers (users). There are many cases to the contrary, one such example of production ethics is as follows: Pan Bahar, Pan Parag, Tulsi, etc., are all brands of chewing tobacco products that are addictive and dangerous to health, but are widely advertised and consumed by large number of people across the towns and villages of India. There have been many protests by the NGOs and health activists, but without any long-term effect. There is no common law banning the marketing of such products (excepting near schools and colleges), nor any quality standard for minimising the ill effects of these products. Only some state or locality-wise action is taken by banning product display or advertisement, which is not enough. The manufacturers and sellers of such products are doing good business and the consuming public is continuing to suffer. This is not ethically correct. The ethics of business demand that producers of such products, if they want to continue in this business, self-regulate the quality and bring about suitable adjustments or modifications in the product to minimise the risk or damage to consumers.

It is unethical business if a manufacturer is intentionally producing harmful products and marketing them despite public outcry. Ethics of production would require making such products least harmful—even if selling the otherwise harmful products might be legally permitted.Thus, the business of producing depends on the ethical principles of manufacturers on the one hand, and general perceptions about acceptable levels of risk in using these products on the other— which may ultimately force the producers to think ethically enough to make harmless products (or at least those with minimal harmful effects). Here, tobacco products such as ‘pan masalas’ and cigarettes are a case in point. So, does this mean that a (production) professional should not work for companies that manufacture harmful products? Ethics do not stop a professional from choosing jobs or line of work, but they do forbid one to act in way detriment to the interests, health, safety and welfare of employees and consumers alike. Referring to the earlier example of the production of ‘Pan Parag’, it would be unethical for the production manager to force an employee to work in the mixing room without adequate safety measures—i.e. working without masks or handling the mixture without gloves. While the former could pose a serious health hazard owing to continuous inhalation of fine tobacco dust, the latter could lead to contamination of the product posing a health risk to the consumers. Thus, the action (or negligence) of the production manager can affect the interests of people involved in the manufacturing process as well as those using the product.

Such actions (or the absence of positive actions) that let some damage happen to incumbents (employees or consumers) would be construed as unethical. The ‘Pan Parag’ example goes to illustrate that, in ethical conduct of the profession, it is not the choice of profession but the way in which a professional responsibility is discharged that matters. Ethics and morality demand

Ethics in Business and Corporate Governance

that professionals involved in a business should not knowingly participate in activities that could harm the interests of consumers, employees or the environment. Understanding the role of ethics, and regulating oneself in the profession, has gained importance with the growth of service industries like hospitality, health care, tourism, facility management, etc. In the service sector, products are designed or produced by experts and professionals like chefs, doctors and nurses, tour-operators, tour planners, etc. for the facility, utility or consumption of consumers. These professionals must be aware of the rules of ethics in their operations and in the delivery of products and services; they have ethical duties and responsibilities towards their consumers who depend on the good sense and dutifulness of such service providers, directly or indirectly. For example, quality of food, not only in its taste but also hygienically, will depend on the hygienic environment and habits enforced by the chief chef in the kitchen of a food outlet or hotel. If the chef makes any compromise, it could endanger the hygiene and quality of the foods being served to and consumed by the customers, and may even cause illness.The chef ’s action thus has the potential to harm the health of the consuming public, and, therefore, it is best when these professionals are guided by ethical duties and responsibilities of their respective profession so as not to harm the consuming public. Similarly, doctors and nurses engaged in the health care services have ethical duties and responsibilities towards their patient so that their health does not suffer any further, owing to delay in treatment and inadequate nursing among other things. In this context, it should be understood that such professionals are engaged in producing and managing those kind of services and products that have a customer, have attached value for the customer, have a price to be paid (for their service or product), have to deliver quality as promised or understood, and have to deliver on time. If the concerned professional indulges in any deficiency of service or product, willingly or unknowingly, then it is termed unjust and unethical—no matter if that deficiency had earned any personal gain for that professional. With the technological advancement, duties and responsibilities of professionals engaged in different fields of consumer production are becoming increasingly important. For example: The recent trend to produce hybrid fruits and vegetables is believed to have some side-effects and may be considered undesirable. But, there is no denying that the technological development and production is deemed to be necessary if we are to cope with the increasing demand on food grains and consumables owing to the population explosion in some parts of the world. Hence, what should be the direction of ethics—feeding the mouths of hundreds of people or side-stepping technological advancement due to some possible side-effects?

Ethics are not against technology; they are, in fact, concerned whether that technology brings more misery than good to the society. If hybridisation of agricultural produce brings appreciable benefits to consuming masses in a country, then it could be ethically supported—although with words of caution to the consuming public, about the possible side-effects. It would then be left to consumers themselves to choose—as is the case in the health-conscious western economy. In a similar analogy, the production of mass destruction weapons could be ethically denounced as the technology employed is designed to do more damage to the society than good (through

Professional Ethics

generation of employment and wealth). The touchstone of ethical judgement is to question if, in the ultimate analysis, it is good for the consumers, employees, society, or public at large? Production professionals should thus examine issues from the angle of ethics, and introspect about its good and bad effects. The need for ethical discipline and governance arises due to the fact that there are elements of conflicting interests in business amongst the partners of business processes (e.g. owners, investors, employees, consumers, government, society, local bodies, etc). Thus, ethics can provide the just and fair path for progress in such conflicting situations.

6.3 ETHICS OF MARKETING PROFESSIONALS Marketing ethics, discussed in the earlier chapter, may not be enough to understand how they concern marketing professionals as well. This requires some profession-specific discussions and reinforcement of thoughts on professional responsibility. To begin with, all marketing transactions with customers are carried out through the interface of marketing professionals. Therefore, dealings of these marketing professionals are a critical indicator of ethical standards in the business. These professionals not only have the responsibility of their own ethical behaviour, but also of building a good name and goodwill for the organisation. One may argue that a marketing professional is only an employee, and that his or her activities are controlled and regulated by the employer. Hence, the company’s adopted means and ethical standards in marketing may not be any different from his or her exhibited ethics as a professional. But, rules of ethical behaviour demand that, as a professional, a marketing person also has his or her own professional discipline and commitment to ethics.These ethical standards should apply to the customers and people they serve, as much as to their professional behaviour within the organisation. As in the case of employees, professionals neither have to accept any kind of task or assignment nor do they have to be forced by the authorities of the organisation if that task or assignment is not moral. Professional code of conduct and moral conscience should be the balancing factor in the performance of an assigned duty. It should be noted that marketing professionals may be directly accountable to their companies, but they are equally responsible for the morality of their actions and ethics in the marketplace. Ethics in marketplace are essential for fair deals and winning customer satisfaction—both of which go on to secure the ultimate success of a business. The impact of falsehood and deliberate misstatement by a marketing professional can very adversely affect the long-term business prospects. Marketing professionals have the responsibility to be ethical to their customers and society in order to make for better business environment and growth. Ethics of marketing professionals cover the ethical issues in relationships between the company and the marketing persons, as well as their customers—including the public as potential customer. In other words, ethics are more like a service transaction with a ‘customer-supplier relationship’ between the company and the marketing person on the one hand, and the marketing person and the customer on the other; this relationship aims to fulfil each other’s needs and expectations. If this is the platform on which marketing professionals have to work, then they have to be careful not to lend their weight or support in hurting the interests and well-being of customers. They have to be mindful about their ethical duties and responsibilities in the marketplace. Referring to the sale of spurious drugs in exchange for a hefty commission, no ethical and moral professional

Ethics in Business and Corporate Governance

can undertake such a criminal task, no matter how handsome is the reward. Ethical standards of a profession prohibit professionals from seeking gains only for themselves, their actions must safeguard the interests of society, consumers and the public—all of whom they are supposed to be serving as professionals.Thus, holding on to ethics and morality in a profession is a dual task, asking for fair and just service to both the company and its customers. On the other hand, marketing is not merely campaigning or providing information or selling products and services; it is about marketing the ‘value of a product’. As per modern management principles, marketing is the value that a company offers through a product, which its customers buy at a price. Similarly, selling is not delivering a product and collecting money; it is about delivering the correct product (characterised by the value proposed by the makers) at right time for the right price. The ethics of marketing professionals comprise sharing information and data about a product in the most transparent manner so that the customer can judge for himself what he or she is buying. Misleading product advertisements, price fixing, operating a cartel, price discrimination, black marketing, etc. are ethical offences. Some of the most rampant violations of ethics take place in the field of (product and sales) advertising, and this needs to be regulated in order to avoid misrepresentation. In this context, both marketing professionals and advertising personnel are responsible for ensuring adherence to ethical conducts and rules protecting consumer interest. Developing countries have rather slack laws when it comes to protecting consumers against false or misleading product features, compared to developed economies where product liability and deficiency can lead to heavy penalty and punishment.Yet, from the professional viewpoint, it is immaterial whether the law is slack or stringent; ethics demand that marketing professionals do not misrepresent or misguide the buyers for personal gains, such as higher commissions, promotions or other rewards. Unlike accountants, marketing professionals have no chartered association of their own; they are included amongst management professionals. Hence, they should follow the ethical code of conduct of the company management they serve. As such, their activities should be monitored and overviewed by the ethics committee or the ethics counsellor of the company. Operating within the boundaries of their company’s ethical norms brings certain limitations to the role of marketing professionals.Yet, as individuals, they are free to raise their objections or deny any unethical task or assignment, which might be acceptable in the eyes of the law and social justice. The advent and advancement of Internet marketing and E-commerce has lend even greater importance to the role of marketing professionals and their ethical behaviour.Access to electronic (digital) data and personal information associated with such transactions is a potential source of misuse that can cause loss or suffering to customers and the public. In fact, expansion of IT-enabled services has opened up tremendous possibilities for online marketing. Such services, however, call for more stringent laws and regulations in view of the enhanced ethical and moral responsibility of marketing professionals as the custodians of customer data and information. Companies dealing with E-commerce will have to train their workforce to maintain the ethics of custodianship—so that people working in E-commerce must not cross the ethical lines. At this juncture of India’s E-commerce revolution, many believe that the regulatory bodies like NASCOM should take initiative to formulate a code of conduct and ethics for the work areas

Professional Ethics

of E-commerce and BPO—both of which deal with the confidentiality of data and information of a large number of customers. Moreover, as more and more people partake of these new channels of marketing, there should be stricter laws to prevent cyber fraud along with effective regulation to control unethical conduct of business by professionals in these fields. Examples of such newer areas of marketing include: television marketing, E-commerce, telemarketing, BPO services, etc. Furthermore, with the growth of telecommunication and electronic marketing, the role and responsibility of marketing professionals are becoming even more significant to the good health of business. However, despite all the regulations and legislations a country may have, to control any wrongdoing in any marketplace, the ultimate solution rests in the character and moral standards of the individuals who are in the profession of marketing.

6.4 ETHICS IN HUMAN RESOURCE MANAGEMENT The role of human resource (HR) professionals is becoming increasingly pivotal in management, more so because of the growth of the service industry and the consequent dependence on a ‘knowledge-based’ workforce. HR professionals are entrusted not only with the recruitment of the right type of people, but also with the task of motivating, training and empowering them— with a broader view to create an organisational environment of honesty, equality and fairness. Traditionally, ethical issues concerning HR professionals pertain to interactions between the company and its employees, e.g. propagating and regulating rights and duties between the employer and employees. Commonly observed unethical practices in the areas of human resource are: discrimination by sex, creed and religion; unfair employment contract; pressure tactics in the workplace; favouritism; matters promoting occupational health hazard; biased performance assessment; disinformation by the managers to serve special interests; etc. Even today, industries suffer huge losses due to unethical HR practices such as strikes, low productivity and damage to assets; the losses are even more pronounced especially in traditional or small industries (e.g. jute mills, sugar mills, metal foundries, etc). Although the management of an organisation often promotes violation of ethics in HR practices, HR professionals—e.g. personnel managers and accountants—can still play a very important role in curbing this tendency of the organisation. More recently, in India, the Society for Human Resource Management (SHRM), and the National Institute of Personnel Management are taking steps to reinforce ethical practices of their affiliate members, through measures such as ethics training. With the roles of HR professionals expanding in today’s industry, the importance of ethical standards and practice in this profession is becoming critical to draw and retain the best talent in their sector. Today’s service industries are so dependent on the quality of people they employ and retain that HR has taken centre stage in the management of many a company. But, are these HR professionals holding on to the ethical standards of the profession? A review of the performance appraisal function of most companies would reveal that employees are generally very dissatisfied with the role of HR professionals. More often than not, the HR personnel act as a tool in the hands of management to perpetuate the exploitation of workers. The frequent notices of shut-down and re-opening in many jute and textile mills, affecting the livelihoods of thousands of employees, are proof of this observation. Although such conflicts stem from many sources, the most important of these

Ethics in Business and Corporate Governance

is the management itself, suggested a 2003 study, conducted by SHRM and the Ethics Resource Centre.5 Going by almost half the respondents of this study, the most commonly cited source of pressure to compromise ethical standards was the ‘need to follow boss’s directive’, followed by ‘meeting overly aggressive business objectives’ and ‘helping the organisation survive’. In modern competitive industry, the quality of employees is the main resource of a business and instrumental in its success. So, while ethical issues concerning HR professionals may be confined to the organisation, their effects can be far-reaching. Employees are the customers or clients of HR professionals, and it is the responsibility of HR professionals to satisfy them with fair and just actions. Like other professions, HR personnel have to resist unethical actions in the organisation, and should not succumb to pressure; they also have to be responsible for adding manpower value to the organisation and promoting ethical standards for the success of the organisation. SHRM recommends the following principles to guide the code of professional conduct and ethics amongst HR professionals: 1. Adhere to the highest standards of ethical and professional behaviour. 2. Measure the effectiveness of HR in contributing to or achieving organisational goals. 3. Comply with the law. 4. Work consistent with the values of the profession. 5. Strive to achieve the highest levels of service, performance and social responsibility. 6. Advocate for the appropriate use and appreciation of human beings as employees. 7. Advocate openly and within the established forums for debate in order to influence decision-making and results. SHRM also expressed that (i) HR professionals are expected to exhibit individual leadership as a role model for maintaining the highest standards of ethical conduct in the company; (ii) they must be ethical and act ethically in every professional interaction; and (iii) they should be ethically responsible for promoting and fostering fairness and justice for all employees in the organisation. These aspects of the conduct of HR professionals are necessary to create and sustain an environment that encourages all individuals in the organisation to realise their fullest potential in a positive and productive manner. SHRM further recommends that HR professionals should not engage in activities that create actual, apparent or potential conflicts of interests in contradiction to the aforesaid ethical and professional standards.These conditions of behaviour imply that HR professionals should: Refrain from using their position for personal, material or financial gain or the appearance of such; Refrain from giving or seeking preferential treatment in the HR processes; and Adhere to and advocate the use of published policies on conflicts of interest, and conflict resolution, within the organisation. These SHRM recommendations leave no ambiguity in the ethical role of HR personnel in an organisation; it is expected that they adhere to this set of professional conduct and ethical 5, accessed on 7 August 2009; http://, accessed on 14 October 2011

Professional Ethics

standards. Significantly, HR professionals are not to lend themselves to any (creation of) divide and conflicts amongst employees, not even under pressure. Morality, justice and fairness must be seen in their actions, decisions and in the implementation of HR programmes. In practice, though, there are frequent departures from the recommended behaviour, especially in a country like India where there is acute shortage of employment and all employers are not necessarily fair and just to their employees. Most HR personnel in India might confide that, under the business systems and practices prevailing in India, being ethical does not pay at all. There are instances of victimisation and harassment of employees without any reason, or exploitation with the lure of benefits and promotion for the personal gain of others. HR personnel may not have been involved in all such cases, but, at the same time, they have not discharged their professional responsibility in those cases either. Such indifferent HR practices (indifferent to the cause of their customers, i.e., the employees) may bring about a high level of employee dissatisfaction—which goes against the long-term interest of the business. HR professionals must be fair and just in discharging their professional duties to employees who are their recognised customers, if not for the sake of the organisation, then for the shake of their own professional conduct.

6.5 ETHICS OF FINANCE AND ACCOUNTING PROFESSIONALS One of the critical areas of business where ethical violations are frequent is finance and accounting. Many a company have indulged in misrepresentation of facts by doctoring its accounts in some unconventional way—while staying within the bounds of the prevalent accounting system—such as inflating the earnings, providing misleading financial statement, etc. Fraudulent manipulation of financial markets and stock markets are other examples of unethical business practice executed or aided by highly skilled accounts professionals. Considering that the impact of financial frauds can be very severe and can cause loss of benefits to many individual stakeholders of the company, ethics of business accountants are an important issue. As these areas call for high levels of skill and competency, the compliance to ethical rules and obligations lies mostly in the hands of certified professionals like chartered accountants, auditors, etc.Therefore, professional bodies like the Institute of Chartered Accountants of India and the Institute of Cost Accountants have since formulated their code of ethics6 that is mandatory for practicing in their respective fields of work. In order to ensure adherence to ethics in this profession, more transparency and disclosures—in accounts and related information on risks, sources of income and revenue, compliance to regulatory provisions, etc.—are being called for in general accounting practices. Ethics in accounting has become even more important with the growth of international trade, as a result of which countries engaged in mutual business are seeking adherence to globally accepted accounting norms in order to check and prevent fraudulent and unethical accounting practices. In view of this, ICAI has now mandated that Indian accounting norms must converge with the International Financial Reporting Standards (IFRS) by 2011, to ensure 6, accessed on 17 August 2009

Ethics in Business and Corporate Governance

better disclosure norms and prevent profit book frauds. However, it is no guarantee that all accounting frauds will not occur after the adoption of IFRS norms; they would only become a bit more difficult. Hence, the need for change in professional attitude and ethical conduct in this coveted profession still remains uppermost for the safety of investors, employees and society. Again, statistically—following the 80–20 rule of Pareto’s law7—it is not the majority but only a few professionals who are the cause of such complaints and ethical problems. Nonetheless, accounting is a core function in business, and ethics in accounting is a critical factor for the success of any business. Hence, ensuring ethical accounting practice is a core requirement of good corporate governance. Financial fraud involving accountants and auditors is not uncommon in any country. The series of accounting scandals reported in the US during 2001–02 was mostly due to the complicity between the accused corporate heads and their accountants—including external auditors. Similarly, unholy alliances between corporate heads and the company auditors are emerging from the investigations of the massive accounting scam at Satyam in India during 2008–09. Financial irregularities worth Rs. 70 billion have depleted corporate funds that rightfully belong to Satyam’s shareholders, investors, employees and clients. This, in turn, has not only damaged the interests of the company’s stakeholders, but has also been a big blow to the country’s business morale. What is ethically unpardonable is that the very professionals, who were trained to detect and prevent such frauds and scams, became partners in the crime. The governments in many other countries have ‘oversight agencies’ to check and control financial irregularities, but what is most required is professional integrity, and ethics of honesty and trustworthiness. Alarmed by the increasing manipulation of the books of accounts, ICAI has drawn up an elaborate list of rules and conducts for professional practices of chartered accountants in India to promote the ethical culture of: Service before self and extending beyond the legal requirements. The institute aims to promote this motto as ‘mission’ of the accounts profession. To promote ethical work culture amidst practicing accountants, ICAI also prohibits its members from pursuing another profession, soliciting clients, taking financial interests other than fees, and writing of books of accounts of the auditee-company in order to prevent conflicts of interests that may lead to violation of conduct. The purpose of such codes of ethics is not to restrain an accountant’s practice but to remind him that he is morally responsible for preventing or minimising damage to the society, clients and government. Ethics in financial audit have become so important (due to the potentially hazardous impact on the business and investing public) in the global business that most developed countries, including the European Union (EU), have now made it compulsory that: (i) countries must have an oversight office or an independent review board; (ii) auditors of firms seeking to do business with the EU or listing themselves at stock exchanges must be registered in the country; (iii) audit firms must have a website wherefrom all details and ‘sensitive’ information (income, percentage of revenue coming from auditing, policy of remuneration of partners, etc.) can be obtained; and (4) the audit practice must conform to a recognised accounting and disclosure practice (e.g., GAP, IFRS, etc.). The 7, accessed on 13 October 2011

Professional Ethics

purpose of such safeguards is not to prevent doing business with unethical professional practices, but to prevent any hazardous effect arising from the same. In business, the fallout of unethical financial and accounting practices has widespread influence on business climate, potentially damaging the interests of the nation’s overall business environment in addition to damaging the interests of a large group of consumers, employees, and small (retail) shareholders. Hence, every country has its own regulations and laws (e.g., the Income Tax Laws, Company Board Laws, SEBI regulations, etc.) to regulate the practice and prevent wrongdoing.Yet, financial scam and frauds occur at frequent intervals in all countries, necessitating intervention or support from ethics and ethical standards of professional practices, which are in addition to the regulatory norms of aforesaid bodies and come under the ambit of institutional controls. Another example of financial fraud and violation of ethics is the sudden closure of many NBFCs (Non-Banking Financial Companies) in India, which affected thousands of depositors and resulted in the loss of millions of Rupees of public money.8 This happens every now and then in every part of India, despite strict Reserve Bank of India (RBI) guidelines and regulatory provisions. The country’s financial history is dotted with such scandals beginning with the closure of ‘Sanchita Chit Fund’ in early 1980s in West Bengal, to the recent warning by RBI to a very large and organised NBFC company in Lucknow. Such financial scandals due to non-ethical means of doing business have all coerced, duped or induced the unsuspecting investing public; they have manipulated the business process so as to divert money to other funds so that investing public cannot claim any residual benefits from the leftover assets. Thus, the ways many of these NBFCs violated laws with the intent of duping the investing public, are proof of bad business practices; and, frequently, these cases have been perpetuated with the help of accounts and finance professionals. Very often, accountants are found to be willing partners and facilitators to such game-plans. Ethics in accounting are critical for a country’s economic progress, because money and money management is the key to all economic development and business enterprises. The impact of these professional ethics go well beyond the scope of business operations—it harms a nation’s capability to foster the economic well-being of its people, and hurts the pockets of many pensioners and old people, affecting their livelihood and health care. Hence, professional ethics of accounting professionals are critical for a nation’s economic progress, the health of its financial markets and the confidence of other countries in its financial and governing systems, to protect the welfare of public and the society. Experience has shown that the system of rules, regulations and controls through codes of conduct may not always be effective enough; accountants have to be moral, courageous and self-regulating to ensure ethics and prevent wrongdoings in their profession. Unless professional accountants themselves rise up to the challenges of ethics in their profession, no amount of legislation or ruling in this direction would serve the purpose.

6.6 ETHICS OF ADVERTISING Advertising is a means to provide information about products and services to consumers. It comprises two parts: (i) designing information; and (ii) delivering or advertising that information 8 iex28060.html, accessed on 13 October 2011

Ethics in Business and Corporate Governance

for public utilisation. Both these are achieved through advertising firms and professionals specialising in client servicing, copywriting, visualising and advertising through select media. Advertising is a big business in this age of promotion and marketing; companies are making huge investments in their annual advertising budgets. In a recent example, the telecast rights for the Indian Premier League cricket matches were sold for a huge amount and so were the advertisements therein. Advertising is very expensive; it does not come free to consumers as generally appears to be. In the end, advertising costs are covered by the prices consumers pay for the goods and services they buy. Hence, it is natural for consumers to question what they get for the money they contribute to advertising. In that, are the companies (making products or services) or advertising agencies fair, just and ethical to consumers affected and influenced by the advertisements? Let us review this by analysing some advertising myths9: Advertising is a means to market promotion and reaching out to customers, but there are some things that advertising, by itself, cannot do or provide to customers. Let’s dispel a few of the most common misconceptions. Advertisements are not always about the best product, nor truly represent a product quality that meets a customer’s needs. Most of the time, it makes customers buy that they should not. Advertising also do not necessarily provide all relevant information that one should have for making a buying decision. Yet, advertising is the most important means to promote a product in a competitive market. Most people agree that advertising brings competitiveness, which favours the customers, but most consumers, on the other hand, have little market knowledge outside the advertised information (without market research report) to know where to get the best-value product. Thus, buying through advertisement is fraught with some risks to consumers. Hence, it is quite common that consumers mostly rely on the word of mouth of someone they know for making a buying decision; though they are indirectly paying for the advertisement costs. Nonetheless, advertising has been firmly established as a primary mode of marketing promotion, and few can think outside of it. And, with the advancement of the Internet as a channel for marketing and commerce, advertising is taking the centre stage of consumer marketing.

Companies claim that basic function of advertising is to provide consumers with ‘information’ about the products and services available to them, which is beneficial to both the suppliers and the consumers of goods. The benefits of advertising should be looked into from the viewpoint of information supply chain. Proponents of ethics in advertising claim that the information thus put across to potential consumers through advertising is not neutral, and hence is unfair to them. Nowadays there are supplementary agencies that attempt to measure the gain and loss from advertising efforts of a company and the effectiveness of the company’s advertising agency in bringing home increased profits. But, ethics of advertising are not only about the gain or loss from advertising; they are also about the correctness, appropriateness, openness and fairness of the content of an advertisement in relation to its recipients, customers or the society at large. Is it ethical to advertise ‘hair oil’ claiming that the oil cures hair loss and turns grey hair into black within 14 days? Yet, this is happening in the country’s advertising world and with very little protest. Such unfair ads have 9, accessed on 13 October 2011; and http://www.bazaarvoice. com/resources/stats, accessed on 18 February 2010

Professional Ethics

penetrated the market so much so that, from time to time, the Government of India has to crack the whip on erring advertisements that are very unfair and misleading. Let us consider one such instance: As reported in The Telegraph, Kolkata, 22 February, 200910, the Health Ministry in New Delhi declared that the ‘advertisements that promise to make one fairer within weeks are misleading’ and wrote to the Ministry of Information and Broadcasting to take action against campaigns that make such claims. It declared, ‘Fair is fine, but promise is foul … this needs to stop. They cannot say within one week you will be white…’. The Ministry, along with ASCI and other advertising agencies, media and associate professionals, planned to crack a whip on erring advertisers, it was reported, ‘The concerns raised by the Health Ministry are genuine. There are so many ads, both in print and on TV, which could mislead the consumers. We are in touch with various bodies, including ASCI, to bring out a procedural code to make advertisers more accountable,’ a Ministry official told the newspaper. ‘The ministry is also thinking of coming out with a campaign to encourage viewers to send their grievances to these commissions if they find any advertisement offensive’.

Dishonest and misleading advertisements have become so common that Consumer Protection Councils are now flooded with complaints regarding their deceptive nature. Consumers must be protected from such deceit; they pay for the cost of advertising with the products they buy, hence, can ethically expect to get some worthwhile return instead of misleading and harmful advertisements. How many consumers get the correct information about a product advertised on television? How many consumers can really filter useful data and quality parameters from, say, a car ad? How many consumers get guidance about true product quality and usage tips from a skincare product ad? If the answer to these questions is ‘very few’, then why should the large majority of consumers be subjected to pay for the cost of advertising if it is not adding any value to their purchase? If advertisers are in the business of making money through services to readers and consumers, then they have the professional responsibility to be honest and fair in their creation and representation. Many claim that advertising (electronic and print) is necessary to reach out to the masses and trigger a thought about buying a product; the rest of the buying business should be completed through other ‘search’ methods. Search methods would include contacts, user experience, Internet surfing, questions and verifications, inspection and demonstration, etc.This sounds fair, but then, in the first place, why are advertisements created in a way that is more misleading than leading? If we take a page from the TQM book in the advertising business (surely advertising is a business by its merits and deeds), then who are the customers of their advertisements and how do they propose to serve those customers in all fairness and to their satisfaction? A company intending to advertise its product for sales promotion generally leaves the imparting of details to the creation of the ad agency; it is the overzealous approach of the ad agencies to satisfy their clients (companies) that often lead to an overkill in the ad. In this context, there is a serious need for self-regulation and self-restraint to keep this profession free from unethical practices. Ethics 10, accessed on 13 October 2011

Ethics in Business and Corporate Governance

are not against reaping benefits from a profession, but are against reaping benefits by unfair and misleading means and creations. Figure 6.2 depicts the ‘Golden Rules of Advertising’ Ethics, which have considerable influence on the society and consumers. Golden Rules of Advertising Ethics

Ensure truthfulness and honesty of representation

Safeguard against misleading advertisement

Ensure that advertisements are not offensive to caste, religion, colour or creed

Avoid promotion of product hazardous or harmful to society, particularly to children and minors

Ensure fairness of competition and adherance to social welfare

Figure 6.2 The ‘Golden Rules of Advertising’ Ethics

There are numerous examples of print and electronic ads wherefrom potential consumers get very little, but for which they indirectly pay. It is generally acknowledged that advertisements often do not really include objective information for consumers for the simple reason that primary function of an ad has come to be ‘not that of providing unbiased information but glorifying product information’. If the task of advertising is viewed in terms of a ‘buyer-seller’ relationship, then it can be defined as a kind of commercial communication between a seller and potential buyers (customers). Hence, ads can be looked at as: (a) a publicly addressed communication to masses; and (b) created with the intent to induce several members of its audience to buy the seller’s products. This view of advertising raises the following ethical issues: (i) The social effect of advertising, arising from the view that advertising, being a publicly addressed system for specific commercial communication, would have widespread effect on the masses and society; (ii) Advertising is a means to create consumer desires to buy a seller’s product; and (iii) The effect of advertising on consumer belief, in that the product is a means of satisfying some desire of the buyer. The social effects of ads have many ramifications; often, people find the visuals in ads as being tasteless, disgusting and even vulgar at times. For example,TV ads for some brands of toothpaste, undergarments, over-the-counter pharmaceutical products, birth control products, etc. take frequent recourse to irritating and aesthetically unpleasant displays to make the advertisement effective. Many viewers consider this unwarranted and catering neither to good taste nor to the healthy growth of society. No doubt, not all ads are tasteless or vulgar, but the effects of tasteless and unpleasant displays, even if comprising a small portion of the total ad outlay, can cause psychological effects on simple-minded advertisement-believing public and society, especially children. Another aspect of advertising in general is that they are made to propagate or promote materialistic values and ideas about how to be happy or different or distinguished in the society,

Professional Ethics

most of which is not a true representation of reality. This leads people to overlook their basic needs and requirements, and influences them to believe in the ad-up utility of things—and, thus, they spend money to fulfil those needs instead of the basic ones. As a consequence, an imbalance is created in the spending patterns of the people in society diverting the resources from creating happy living to raved-up living. Critics also claim that advertising leads to wastage, because a large number of consumers still depend on the ‘word of mouth’ mode of buying.11 They observe that the cost of advertising does not—in any way—improve or add value to products; it is spent on persuading people to buy instead of on making the product of that quality and value which to speak about for buying. Thus, advertising can divert resources away from hardcore research and (product) development (to add value to the product); instead advertising encourages expenditure on creating a socio-psychological desire in the minds of the masses for the sole purpose of ‘ensuring that people buy what is produced’. Critics claim that this is an easy means to create a market, which may adversely affect the long-term growth of technology and industry. Renowned economist John Kenneth Galbraith12 in his book—The New Industrial State—had implied that advertising is a means to shift the focus of decision, in the purchase of goods, from the control of consumers to the control of firms. If this is correct, then advertising is an instrument to manipulate consumers, which violates the individual’s right to choose for the self. By this contention, it is an unethical means for the end results and purposes of the producers (companies). However, it is unclear if this view of advertising can be extended to all advertisements. Is it always possible for advertisements to manipulate psychological desire and individual choice? Proponents of advertisements say that the purpose of advertising is not to limit consumer choice, but to open up the opportunities of choices in a free and competitive market. Consumers need to exercise caution, and to distinguish and choose the good (for the self) from the bad.This is a fair view of the purpose of advertisements, and advertisers must adhere to this view and work transparently and consistently towards achieving the same. Many proponents of advertising also caution that the deceptive nature of contemporary ads, especially in the electronic and Internet media, cannot be totally ruled out. Ads, being a form of communication, can be as truthful or deceptive as any other form of communication, if not treated with care and caution. ‘Consumer beliefs’ must consider this general characteristic of this type of communication, i.e., not to take advertised communication at face value but to accept it upon verification. There are numerous instances of deceptive ads in all kind of media, which include: false claims, padded up testimonials, failure to disclose possible shortcomings or side-effects of a product—either of which could be potentially harmful—and offering product ‘guarantee’ along with the fine-print that ‘conditions apply’. Deception in advertisements has been ethically condemned on the grounds that it violates the consumer’s right to choice and fairness, and offers less utility than as perceived from the promises or claims made in the ad. Let us consider the false advertising pertaining to the realm of higher education in India: 11, accessed on 13 October 2011, accessed on 18 August 09; and Kenneth_Galbraith, accessed on 13 October 2011; and, accessed on 14 October 2011 12

Ethics in Business and Corporate Governance

With the increasing spate of false advertisements in matters of higher education13 and educational institutions, and complaints arising from such misleading information, the Human Resource Development (HRD) Ministry, Government of India, and a perplexed University Grants Commission (UGC) are rushing to clarify through public notice the status of such questionable institutions with respect to AICTE (All India Council for Technical Educations) approval. The problem is that the claims, despite being inaccurate and misleading, are not always actionable in the court of law—as of now—in India. A recent news report (The Telegraph, Kolkata, 5 April 2009) talks about repeated advertisements in print and on TV where a private university (name withheld) claims it is rated the best in its category, and that it is recognised by the UGC, the country’s apex higher education regulator. In reality, UGC has not inspected the university; in fact, UGC official say that the varsity physically prevented them from examining the claims. Claims and counter-claims continue in this regard, as both parties cite some court rulings or the other. Yet, in the present frenzy of higher education in India, the fact remains that students are enrolling in such sub-standard courses and institutions. To help these students, UGC clarified that prospective students should at least find out if they are seeking admission to a UGC-inspected institute, and if their technical course is AICTE-approved. If students find that the university is evasive in handling these queries, they should contact the UGC to crosscheck the antecedents of that particular university or insitution.

This is a typical case of how advertisements can affect the morale and future of students—who are the very future of the nation. Persons, institutions, companies or ad agencies indulging in such misleading and deceptive advertisements are certainly not moral or ethical. They have overlooked their responsibility to the society—to allow or facilitate individuals to choose what is right for them by providing a truthful picture and correct information. Manipulation of information to falsehood is not ethical advertising; advertisers (copywriters, producers, media) should not tailor any content with the intent to make an audience or public believe something that is wrong or false.That would tantamount to lying, which is unethical. But, in the backdrop of competition and materialism, advertising is—and will remain—a recognised means for product promotion; in a free market, neither can advertisements do without consumers, nor can consumers do without advertisements. The ethical and moral issues raised by advertising and advertising practices are rather complex due to several unclear effects. Nonetheless, it is certain that advertisement and advertising ethics do have effects on individuals and the society in their free choice, desire about what to buy, buying, and the belief that they have bought what they wanted to buy. Advertising professionals have to self-regulate their conducts and creations in order to help the society for realisation of this utility goal. Certainly, not all advertisements are wilful misrepresentation or all advertisers are unethical. Advertising world is also evolving itself to the necessity of free-market conditions and glory of ‘total quality’. If some advertisers fail to give true and neutral information or communication about advertised products, buyers have to use their alternative sources of information, discretion and judgement for buying in 13, accessed on 18 August 2009; and Anandakrishnan.pdf, accessed on 13 October 2011

Professional Ethics

this materialistic and competitive world, which will destroy the very purpose of this profession. ‘Internet’ and internet sites are fast emerging as one such alternative source. In recognition to this present state of advertising ethics, Advertising Standards Council of India (ASCI) a self-regulatory body of advertisers, ad-agencies, media, and associate professionals, are planning to check the contents of advertisements and crack whip on erring advertisers.

6.7 ETHICS OF MEDIA REPORTING Ethics of media reporting is, perhaps, best reflected in the statement of a senior journalist who said: ‘Journalism occupies a special position in the society because their role and function influences the masses, but he cautioned that they need to subscribe to a code of ethics in the course of their professional duties.Truth, objectivity and privacy are some of the issues that must be carefully pursued’. In today’s world of mass communication, there could not be anything more important than ethics of the media reporting professionals. Media reporting has primarily two parts in its functioning: (1) one is journalistic in nature—reporting (and sometimes analysing) the happenings and trend of happenings in various fields of interests like Social, Political, Economical, Environmental, Educational, Historical, Cultural, Sports, etc. and (2) the other part is to carry advertisements or personal information as communication to public or select group of readers or viewers. Ethics and ethical rules apply to both these areas. Media functioning as carrier of advertisement closely related to ethics of advertising, where a part of the responsibility for truth in advertising rests with media that carry the advertisements. Media should not knowingly lend support or cooperate with the advertisers for advertisements that are intended for misleading the public or society. For example, a Calcutta TV channel is seen routinely putting up with advertisements that declares: “studying in X-institute (naming avoided) means sure job in Government Organisation” or another one: “so and so Institute (which is yet to be fully launched) is the leader in giving birth to twenty first century leaders of the nation”. These are obviously false claims; meant to attract more admission of students to these Institutes by making attractive but false promises, and the media is apparently willingly cooperating with the advertisers for creating the ‘desire and belief ’ (as discussed in Section 6.6) in certain section of viewers. The concerned Institutes may claim that they believe in what they have advertised, and they will work for fulfilling the promise, but can the media accept the contents of advertisement that are most likely to mislead the society and children? Very often a trend is being observed now in the Indian news-media to insert a disclaimer at the bottom of the page declaring that newspaper is not responsible for any accuracy of information and readers are advised to verify the contents.This may help the media to defend itself from any law suit, but it cannot absolve the media from moral responsibility, because the media is placed in a responsible position by the society to project truth and facts for general consumptions. Therefore, ethics and ethical duties demand that media take steps for ensuring that contents of advertisements are not (altogether) false or misleading. In this regard, it is not enough for the media to depend on the submitted texts and materials by the advertisers; they have the responsibility to verify with reasonable efforts and care before lending their names into the advertised messages. In print

Ethics in Business and Corporate Governance

media, a small print declaration is now sometime seen to be added to inform people that media concern is not responsible for the contents of an advertisement and readers are advised to verify the truthfulness of contents before acting on the information. Media has the ethical responsibility to stop or minimise the damage that an advertisement can cause to the interests of public or viewers or the society. There are numerous examples of electronic and media advertisements that we come across daily in TV, Internet, telecommunications, etc. which are far from truth and mostly misleading. In this age of communication via the recognised routes of media—that are growing everyday with the advancement of electronic and communication technology—we are often left with more of junk information than useful information. Yet, a society critically depends on such media for receiving communications without which our life will be totally bottled-up and stagnant. Does this mean that media can take full advantage of such situation and choose to fail to protect the interests of public and the society? A look into the code of conducts and ethics in journalism to which all such media activities centres around would reveal that it is certainly not so. The journalistic codes insist for adherence to some basic moral and legal duties in order to bring more credibility, honesty, truthfulness and fairness in reporting and contents of communication. However, many also insist that applications of journalistic codes are primarily intended for reporting, editing and analysing of news items, and not exactly for media advertising. The latter is still a grey area, which is evolving through the advertising ethics and regulations (as discussed in the previous section in this chapter). Need for code of ethics in media was first recognised in USA when they formulated a code of practice for American Society of Newspaper Editors in 1926. Society of Professional Journalists code of ethics originated from this document and had undergone number of revisions in subsequent years. Ethical codes of the Society of Professional Journalists are based on the belief that public enlightenment is the forerunner of justice and the foundation of democracy in the media. The duty of journalists is to further those ends by seeking truth and providing a fair and comprehensive account of events and issues. Professional integrity and ethical behaviour are said to be the Society’s principles and standards of practice. The highlights of the codes for journalism14 are: 1. Seek truth and report: Journalists should: Test the accuracy of information from all sources and exercise care to avoid inadvertent error. Deliberate distortion is never permissible. Diligently seek out subjects of news stories to give them the opportunity to respond to allegations of wrongdoing. Identify sources whenever feasible. The public is entitled to as much information as possible on sources’ reliability. Always question sources’ motives before promising anonymity. Clarify conditions attached to any promise made in exchange for information. Keep promises. 14, accessed on 14 October 2011, and ethics, accessed on 14 October 2011

Professional Ethics

should be labelled and not misrepresent fact or context. Distinguish news from advertising and shun hybrids that blur the lines between the two. Recognise a special obligation to ensure that the public’s business is conducted in the open and that government records are open to inspection. : Journalists should: Show compassion for those who may be affected adversely by news coverage. Use special sensitivity when dealing with children and inexperienced sources or subjects. Be sensitive when seeking or using interviews or photographs of those affected by tragedy or grief. Recognise that gathering and reporting information may cause harm or discomfort. Pursuit of the news is not a licence for arrogance. Recognise that private people have a greater right to control information about themselves than do public officials and others who seek power, influence or attention. Only an overriding public need can justify intrusion into anyone’s privacy. Show good taste. Avoid pandering to lurid curiosity. Be cautious about identifying juvenile suspects or victims of sex crimes. Be judicious about naming criminal suspects before the formal filing of charges. Balance a criminal suspect’s fair trial rights with the public’s right to be informed.

Ethics in Business and Corporate Governance

3. Act independently: Journalists should be free of obligation to any interest other than Avoid conflicts of interest, real or perceived. Remain free of associations and activities that may compromise integrity or damage credibility. Refuse gifts, favours, fees, free travel and special treatment, and shun secondary employment, political involvement, public office and service in community organisations if they compromise journalistic integrity. Disclose unavoidable conflicts. Be vigilant and courageous about holding those with power accountable. Deny favoured treatment to advertisers and special interests and resist their pressure to influence news coverage. Be wary of sources offering information for favours or money; avoid bidding for news. 4. Be accountable: Journalists are accountable to their readers, listeners, viewers and each other. Journalists should: Clarify and explain news coverage and invite dialogue with the public over journalistic conduct. Encourage the public to voice grievances against the news media. Admit mistakes and correct them promptly. Expose unethical practices of journalists and the news media. Abide by the same high standards to which they hold others. These codes of conducts are aimed at comprehensively covering all aspects of media reporting where thoroughness, honesty, fairness and accountability are the cornerstone of journalism. If media reporting follows these rules and ethics, there would be little dispute or debate about the ethics of media. Unfortunately, there are violations of ethical standards and instances of siding with parties of influence, power and politics to promote some direct or indirect gain. The situation is equally disturbing in both national and international coverage of information and communication. Recent instances of biased and partial journalism include the international coverage of Iraq War, highlighted as the ‘war on terror’; the efforts of rich nations towards poverty elimination; violation of human rights, etc. Journalism must be responsible to promote a fair and unbiased understanding of the subject of media coverage. In a growing economy and evolving society like India, biased and distorted media coverage of political, legal and economic issues are increasingly creating more of divide than unity in terms of public opinion and views.This type of journalism has harmed the greater interest of the society and precipitated many conflicting and complex issues rather than bringing about a solution. Many believe that increasing complexity of political, social, and economic problems and issues in India are due to failure on part of the media to take a fair, just and objective stand on those issues. Media could be a business of its own, but it must not focus on serving the opportunity for financial and other gains at the cost of responsible journalism. Recognition of journalism and the power in the hands of journalists

Professional Ethics

must not bring about any harm to the nation or promote conflict in the society or divide the nation in any way. With the increasing penetration of media—both print and electronic—into our lives and living, responsibility, accountability and ethical conduct have assumed much greater importance than what appears. Good taste; objectivity in reporting; compassion and respect for the privacy of those who may be adversely affected by certain news coverage; ensuring accuracy of information; recognising special obligation to public and society; and remaining free of activities that may compromise integrity or damage credibility are a few important guidelines for fair and ethical media reporting. In today’s world, no society can progress without the support of effective and fair media and media practice. The impact of media reporting is so high that this is even called the ‘fifth power of a state’; the country, therefore, needs an ethics conscious media. This can be promoted more by self-regulating the journalistic approach and coverage in adherence to the journalistic code of conduct—rather than by imposing external controls, censors or criticisms. The SPJ advocates a novel way of self-correction: to encourage the public to voice grievances against the news media. The examples of this practice and expression are often manifested in the news-media through the ‘Letters to the Editor’. Yet another area of concern in a society relates to pictures, depictions and ‘shows’ shown on TV, which are generally believed to be in bad taste for the viewing of children and some other weaker groups of viewers. We might argue about the purpose of such shows and about the entertainment needs of target viewers, but the media cannot harm the interests of some underage or weaker sections of society while serving the others. It has the added responsibility of not exploiting the social or economic divide between people and the society. Media is not necessarily restricted to particular viewership or readership; it being an open communication system, is generally open to all. Hence, many expect that media, providing such shows and pictures, should behave in an ethical and responsible manner in the context of a nation, region or the community it serves. Media is as an institution as academic institutions when it comes to spreading knowledge, information and nation-building thoughts and ideas. Journalists should bear this fact in mind and accordingly strategise their media reporting and catering to public at large. Any irresponsible and unfair means to provide information and communication, or tailoring programmes and coverage to cater to the special needs of some viewers for commercial gains will be unethical. And, while pornography would undoubtedly bring added viewership and increased advertising rating for the channel that airs it, this would be highly unethical (and illegal in many countries). In India, the rapid addition to TV channels and their programme content draws a lot of criticism for partial, bias and tainted shows. People have every reason to voice their concern against such uninhibited and unethical shows and displays for general viewing. It would be futile to argue or take a stand (‘viewers be aware’, ‘lock your channel’, or ‘consumers to choose and view’); what matters in a developing and socially heterogeneous country like India is the spirit of moral duty and ethical responsibility to the society and public at large. Ethics are not an external regulation; they call for self-consciousness and self-regulation about what is moral, fair and just so that the wellbeing of society or individuals is not harmed in conducting business and affairs of a state.

Ethics in Business and Corporate Governance



Health is, indeed, wealth. Health of people is the primary indicator of good governance of the country and well-being of its society. As per Article 25 of the Universal Declaration of Human Rights15, everyone has the right to a standard of living adequate for the health and well-being of oneself and one’s family, including food, clothing, housing and medical care and necessary social services. In the modern world, health care is regarded as a basic necessity of the people, and every State has the responsibility to work towards that goal. In recent years especially, the importance of health care has increased many-fold owing to the effect of socio-economic pressures and the stresses of modern industrialised lifestyles on the population. Increasing demands on health care services, and the need to make quality services available to the masses, has compounded the issue of ethics in health care and medical services. The problem is even more pronounced in the countries of the developing world which face acute shortages not only of quality services but also of qualified professionals. The necessity to hold on to certain basic ethics in the medical profession is not new, it has existed since the beginning of human civilisation and medicinal practice.‘Charaka Samhita’16, the ancient philosophy of Charaka, prescribes an elaborate code of ethics for medical professionals. It states: ‘He, who practices not for money nor for a price but out of compassion for living beings, is the best among all physicians’. However, with the evolution of society, science and statehood, it is widely believed that health is a fundamental right of humanity, and the responsibility lies with the State to promote, govern and assure good and ethical medical services to its people. The right to health brings on the issue of ‘distributive justice’ in managing and administering health care services. Thus, the implied principles of health care services include the ethical principle of care, and making available an acceptable and affordable service to all at right time and in the right manner that assures safety, care and dignity of people receiving the service. Health care should be recognised as a basic responsibility of the state, and the organisation providing health care services should be appropriately regulated and controlled by the state. It must be recognised that health care is a team-based activity where doctors as well as the supporting staff (including theatre and cleaning staff) should work with an ethical mission. Hence, like all other professional services, health care services also require a regulatory approach to the ethical issues of the profession and professionals involved.The medical profession has formed a ‘body of ethical statements’ primarily for the benefit of the patients; yet, there are regular reports of medical negligence and patient suffering due to inadequate or careless medical services. While some such cases have been mentioned earlier as illustrations of care, there are ample court cases in India about the violation of medical ethics and duty of care. Let us view one such interesting case: In the case of Pravat Kumar Mukherjee vs Ruby General Hospital, Kolkata and Others17, the National Commission dealing with hospital deaths, delivered a landmark judgment concerning the treatment of an accident victim by the hospital. The case involves the 15, accessed on 14 October 2011 Indian Journal on Medical Ethics,Vol. 4(4), Oct–Dec 1996 17 Medical Ethics and the Treatment of Accident Victim;, accessed on 14 October 2011 16

Professional Ethics

unfortunate death of a young boy, Sumanta Mukherjee, a second-year B.Tech. student, on January 14, 2001. A bus from Calcutta Tramway Corporation crashed with the motorcycle driven by Sumanta. After the accident, Sumanta was conscious and was taken to Ruby General Hospital about one km from the accident site. He was insured for Rs. 65,000 under a Mediclaim policy issued by the New India Assurance Co. Ltd. Sumanta was still conscious when he reached the hospital. He even showed to the hospital staff the Mediclaim policy certificate he was carrying in his wallet. He also assured that charges for his treatment would be paid and urged the hospital staff to start the treatment immediately. Acting on this promise, the hospital staff started his treatment in their emergency room. However, the treatment was discontinued after 45 minutes, with the hospital demanding an immediate payment of Rs. 15,000. The hospital staff remained adamant on its payment demand and did not resume Sumanta’s treatment though the members of the general public accompanying Sumanta gave an assurance about the payment. Subsequently, these people were forced to take Sumanta to the National Calcutta Medical College, which is about 7–8 km from Ruby General Hospital. Sumanta died on the way and was declared dead upon arrival at the National Calcutta Medical College. His parents approached the National Commission for compensation and adequate relief. The National Commission heard the complaint and directed the opponent Ruby General Hospital to pay Rs. 10 lakh to the complainant for causing mental pain agony. The Commission in its judgment observed: “This may serve the purpose of bringing about a qualitative change in the attitude of the hospitals in providing service to human beings as human beings. A human touch is necessary; that is their code of conduct; that is their duty and that is what is required to be implemented. In emergency or critical cases, let them discharge their duty/ social obligation of rendering service without waiting for fee or for consent.” However, it remains to be seen whether the above award has brought in any attitudinal change in the medical fraternity.

Especially in India, people repose great trust in a doctor, who is considered second only to God. However, more and more people are now questioning the practice, the process of providing health care service and the attitude of the professionals involved. Trust based on ‘goodness’ of the doctor or nurse is slowly giving way to a patient’s doubts and checks before the treatment. But, the problem is that in India not all people are in a position to take an educated view of the situation as they are not so literate, and neither the state nor the medical professionals go out of their way to minimise the hardship and suffering of common people. The general view is that medical professionals are duty-bound to care and treat patients to the best of their abilities, and the state is responsible for building infrastructures, facilities and faculties to ensure that health care services are possible to provide. The American Medical Association (AMA), the leading professional body to recognise the responsibility of medical profession had enacted a code of ethical practices long ago. It states that: as a member of this profession, a physician must recognise responsibility to the patients first and foremost, as well as to society, to other health professionals, and to self.The following principles adopted by the AMA are not laws, but standards of conduct which define the essentials of honourable behaviour for the physician18: 18 Code of Medical Ethics, American Medical Association; Adapted June 1957; Revised: June 1980; Revised: June 2001: Approved: June 17 2001

Ethics in Business and Corporate Governance

improvement of the community and the betterment of public health. A physician shall, while caring for a patient, regard responsibility to the patient as paramount. A physician shall support access to medical care for all people. The World Medical Association’s Geneva declaration (September, 1983) also calls for the medical professionals pledging to: ‘service to the humanity, serving the profession with conscience and dignity, committing to the principle of patients’ health first and above all other considerations, respect for the secrets confided in doctors by patients, and maintaining the honour and noble tradition of the medical profession.’ Indian Supreme Court has ruled that ‘Medical profession is governed by code of medical ethics and etiquettes laid down by Medical Council of India. Although they are for internal self regulations of the profession, it is an obligation on the part of the professionals to fulfil certain rights, expectations of the patients.’19 Therefore, the misconduct of some medical professionals reported in India is not due to the lack of ethical codes or governing principles but due to the lack of care, concern and violation of professional conduct.20 Health care ethics demand credibility, professionalism, quality of service, and patients’ confidence reposed in the doctors. While an Indian court has defined the doctor–patient relationship as a contract for personal service and subject to the Consumer Protection Act 198621,22. the issue of negligence cannot be solved by rules or regulations; it calls for a conscience and commitment to service to humanity, by abiding by the oath taken by all doctors to serve selflessly and with humanity. Like all ethical issues, the failure of ethics 19

Medical Ethics and the Treatment of Accident Victim;, accessed on 14 October 2011 20, accessed on 17 August 2009, and 14 October 2011 21, accessed on 18 August 2009; article/l178-Medical-Negligence.html, accessed on 14 October 2011 22 Medical Ethics and the Treatment of Accident Victim;, accessed on 14 October 2011

Professional Ethics

in health care is also driven by greed and opportunity to make money. A general view of the situation is that while treatment breakthroughs have emerged in modern medical practices, their costs have soared equally. Furthermore, drugs and equipment supplying companies are forging unusual alliance with interested parties to promote products that are not optimum—all this, leading to the continued sufferings of millions in every country. Therefore, the state or the government has the duty to create facilities and resources (trained medical personnel) in the country and administer the health policy to assure people of their basic rights. Both, the profession and the professionals engaged in health care have the ethical responsibility to act and practice the profession with trust, care and credibility. The codes enshrined in the respective national medical council must be obeyed and administered with the spirit of faithful compliance and the conscience that doctors are duty-bound to serve people to the best of their ability and honesty. Another aspect of health care professional ethics is self-advertisement. The Medical Council of India (MCI) forbids advertising of medical doctors and rules advertising by doctors as unethical.Yet, there are plenty of cases where doctors somehow advertise themselves, in a way that cannot be acted against by the MCI for some ‘technical reason’. In addition, in India, exaggerated or false ads by hospitals and diagnostic centres are increasing without any check, which is also contributing to unethical practices in health care services.There is nothing wrong in advertising a business, of which health care services are a part, but that should be in good faith and reflect the truth. Unfortunately, many such ads are more with a view to deceive than to serve patients well within the principles of professional services and codes. Take the example of mushrooming of health care services all over country without adequate infrastructure or supporting qualified staff. Not only are some of these centres charging exorbitant fees, but are also harassing patients with their deficient treatment facilities, inflated bills and coercion at a point of time when patients are in desperate need of help and support. This is regarded as highly unethical professional practice. Professionals associated with these activities have the ethical responsibility to safeguard the interests of public and serve the customers (patients) with promised products or packages. Misleading public with exaggerated claims, advertisements and false promise is unethical; and, behind such a business scenario, there is always some specialised persons or professional who is propagating wrongdoings. However, it should be appreciated that majority of businesses, and professionals engaged therein, are generally honest and ethical within the bounds of legal implications, though certainly there are a few who bring harm to some profession and business. Unethical business practices, supported by some professionals, are not confined only to advertising or merchandising business; they have spread insofar as educational institutions, tourism and tour operations, and medicinal disciplines among other areas. It cannot be denied that some professionals in every field of business are not ethical in their behaviour and dealings. Professional bodies controlling their professions and the government regulators are, no doubt, trying to prevent any damage done to the consumers and societies, but the solution is far from control—as can be concluded from recent cases of business frauds the world over. Justice, fairness and utility are taking a backseat in adapting business strategies for profits. While society grapples with the dilemma of tackling this situation, every country is

Ethics in Business and Corporate Governance

strengthening its consumer protection laws.Yet, nothing works (or is working) when individuals are bent upon making a quick buck even if by doing wrong. Many business philosophers recommend prevention over cure; prevention, they feel, lies in educating professionals about their moral duty to the society and about the merits of ethics in business dealings for the ultimate gain. Punishment may be a deterrent but cannot prevent the occurrence of unethical practices; stricter regulations for control and heavy punishment for violation can help reduce the tendency of such unethical practices in many public utility areas, but the real solution lies in training and counselling the associated professionals to make them aware of the ill-effects to the society, cost to the public, and their ethical duties to the society and public at large. For prevention, extensive education, realignment of social forces and enlightenment in the civil society in the form of reinforced value-system, are called for. Elaborate discussions on professional ethics in all business related fields could lead to some dilution of focus in this book. Nonetheless, it is necessary to touch upon these subjects to make the readers aware of ethical problems—that are challenging the sustainable business growth and harmony in the society—engulf almost all areas of professions, including medical, legal, real estate, tourism, telecommunications, etc.There are horror stories of wrong diagnoses and careless surgery conducted by surgeons, even as abused patients are unable to exercise legal remedies due to complex court procedures and lack of support from other fellow doctors. In the recent past, though, consumer courts have forced some correction upon the abuses or abusers. At times, lawyers behave as if they are above the law that otherwise applies only to their clients.The recent case of a Delhi lawyer arrested on a criminal charge led the other lawyers in the capital to rise in protest to protect their colleague—though he was accused for a serious crime. Is this a fair professional conduct? Though self-regulation has been emphasised in the discussions as a means to minimise such unethical conduct in professional work and workplaces, it has not worked out quite successfully thus far. In the words of Prof. S. L. Rao (former Director General of the National Council for Applied Economic Research, New Delhi), ‘Self-regulation in the professions has been ineffective in India. Associations can set standards, conduct examinations, licence practitioners, but misdemeanours should be covered by legislation, not self-regulation’ (The Telegraph, Kolkata, 29 January 2009).23 Indeed, this should extend to all professionals, including, say, real estate agents. Self-regulating professional associations favour their members over customers. The Satyam scam should be a wake-up call not only for corporate governance, but against the myth of self-regulation.The Parliament must create a new independent regulatory body for chartered professionals that will be open, transparent and consultative. The process must give confidence to complainants that they will be heard and objectively so. Perhaps, based on his wide experience, Prof. Rao does not want to leave the issue of professional ethics to a doubtful start of self-regulation, because the consequences of its failure are proving to be too damaging to the Indian society and economic well-being. In an article titled ‘The Art of Fraud’ (The Telegraph, Kolkata, 23 March 2009)24, he opined that constant vigilance and better 23

Matters of Life and Death, S.L. Rao;, accessed on 14 October 2011 24 The Art of Fraud, S.L. Rao;, accessed on 14 October 2011

Professional Ethics

regulations in India could have prevented the Satyam debacle, which has left its deep scar on Indian business ethics and corporate governance. This may be true for financial scams, but for many other professions the solution lies in self-regulation and conscience of the professionals. As the maxim goes: To be a good manager (professional), one has to first be a good human being; everything will fall in order from that point of goodness and self-regulation.

Summary 1. The chapter reviews a few cases to establish the necessity and importance of professional ethics in business. It has been pointed out, especially in the recent Indian context, that our professional practices are not transparent and are open to malpractices, and there is an urgent need to reinforce existing laws and regulations to protect the public and investors from possible loss and harm from dubious professional activities. 2. Professional ethics refer to the moral standards demonstrated by the professionals working in managing, promoting, marketing or (product) developing. However, business is not the only commercial entity in the society, there are many supporting and servicing professions in the society where professional ethics is equally important, namely in medical, legal, advertising, media reporting, etc. Moral standards and ethics in every profession are essential for the wellbeing and sustainability of business; absence of which could badly harm the society and the nation. 3. Shocked and awed by the fallouts of financial scandals, governments are now concerned about regulating and modulating the behaviour of professionals by reinforcing the laws of the respective country, and the rules and regulations of various professional bodies, with the intent to promote fair practices and moral standards in professional behaviour. This chapter discusses the state of professional ethics, and the ways and means to improve the same, in some function-critical areas like accounting, advertising, media reporting, product development and management, health care, etc. 4. In the discussions, an attempt has been made to present professions and professional responsibility in the light of consumer and social expectations rather than as mere instruments for manipulation and propagation of wrongdoings by the hands of business owners. The chapter describes and demonstrates how professional bodies are reinventing themselves in the task of controlling wrongdoings in their respective profession and regulating the conducts of members therein. 5. Despite all such attempts by the professional bodies and regulators, professional misdemeanours are continuing unabated in most countries. This is contributing to the view that professional ethics can be best regulated by promoting ‘self-regulations’ in each field of activities and binding the professionals by a well-structured code of ethics in their respective fields of activities. Pros and cons of self-regulations have been brought to light wherever necessary, and it has been shown that for effective control and regulation, professional bodies and regulating authorities should move towards educating professionals about social consequences of their actions and selfregulation for control. 6. Many experts argue that self-regulations in most professions have been in force for a long time in the US, but they have been ineffective to curb financial scams or unethical business activities in that country. Nonetheless, many social scientists and business philosophers are recommending

Ethics in Business and Corporate Governance

prevention over cure; they believe prevention lies in educating professionals about their moral duty to the society and merits of ethics in business or professional dealings for ultimate gains. 7. The final emerging view is that stricter regulations for control and heavy punishment for violation can help reduce the tendency of such unethical practices in many public utility areas, but the solution still lies in training and counselling associated professionals to make them aware of the ill-effects to the society, cost to the public, and their ethical duties to the society and public at large. For prevention, we require extensive education, realignment of social forces and enlightenment in the civil society in the form of a reinforced value-system.

Key Words and Concepts Accountants, ethical responsibility of accounts professionals, regulator, self-regulation, financial crimes, professional responsibility, professional ethics, social development, socio-economic institution, government, customer-supplier relationship, ethics of custodianship, ethics of care, codes of professional conducts, Pareto’s law, oversight agency, whistle-blower, social effect of advertising, advertising, free market, total quality, fifth power of a state, professional journalists, public health, consumer protection, health hazard, customer beliefs.

Exercises Check Your Progress 1. Ethical issues of professional activities can be best served by ___________ 2. Professional ethics refer ___________ 3. If professionals are ___________ businesses become automatically ethical and true to their social responsibility and obligations. 4. Ethics do not stop one from choosing jobs or professions, but ___________ 5. There could be regulations and legislations in a country to control any fraud and wrongdoings in the marketplace, but the ultimate solution of the problem rests ___________ 6. Any deficiency of services or product features from the promise by the concerned professional, willingly or unknowingly, should be termed ___________ 7. The touchstone for ethical judgement is ___________ 8. Governments in many countries have taken recourse to forming ‘Oversight’ agencies to check and control financial scams, but what is most required is ___________ 9. Deception in advertisement has long been ethically condemned on the grounds that ___________ that ___________ 10. It is not enough for the media to depend on the texts and materials submitted by the advertisers, they have the responsibility to ___________

Review Questions 1. What do you understand by the term ‘professional ethics’? How do professional ethics differ from individual ethics in business operations?

Professional Ethics 2. Why do professional ethics in the area of finance and accounting get major attention by the regulators in a country? Identify two major financial scams of recent times and briefly discuss their impacts on the society. 3. Describe the steps recommended by ICAI for the professional conduct of Chartered Accountants. Name few other institutions which prescribe such codes of conduct for their professional members. 4. Discuss the role of ethics, and consequences of ethical failure, in any service sector industry. How can the conduct of professionals engaged in that industry be regulated for fairness, justice and utility? 5. Discuss the ethical responsibility of marketing professionals in the light of the following statement: ‘Marketing is not merely campaigning or providing information or selling products and services; it is about marketing the value of a product’. 6. Why are ethics of HR professionals becoming increasingly important nowadays? Discuss the recommendations of the Society for Human Resource Management (SHRM) guiding the codes of professional conduct and ethics amongst HR professionals. 7. Why are ethics of advertising professionals gaining importance these days? Describe, with suitable illustrations, how unethical advertising can harm the consumers as well as society. 8. Identify five important ethical attributes of media reporting as per the guidelines of the Society of Professional Journalists (SPJ). What is the basis of the formulation of the SPJ code of ethics? 9. Critically discuss the merits and demerits of ‘self-regulation’ in professional ethics vis-à-vis regulatory and legislative controls. 10. Do you agree with the view that ‘advertising is a means to shift the focus of decision-making (about the purchase of goods) from the control of consumers to the control of firms?’ Illustrate your answer with examples from the marketplace.

Further/Suggested Reading 1. The Ground of Professional Ethics, Daryl Koehn, Routledge, London, 1994 2. Ethics and Professionalism, John H. Kultgen, University of Pennsylvania Press, Philadelphia, 1988 3. True Professionalism:The Courage to Care about your People, your Client, and your Career, David H. Maister, Free Press, New York, 2000 4. Accounting Ethics, Ronald F. Duska, Wiley-Blackwell, New York, 2003 5. Advertising Ethics, Edward Spence and Brett Van Heekeren, Prentice Hall, Upper Saddle River, 2004 6. Organisational Ethics in Health Care: Principles, Cases and Practical Solutions, Philip J. Boyle, Edwin R. Dubose and Stephen J. Ellingson, John Wiley, Chicago, 2001


Chapter Objectives

Ethics and the Environment To highlight the damaging effects of pollution and environmental degradation To justify why the environment is an ethical issue and outline the ethical tasks To provide an overview of how modern industrial activities cause environmental pollution, pollution types, and challenges of pollution control To discuss the ethics and ethical responsibility of controlling pollution and ecological damage To highlight the damaging effects of ‘greenhouse gases’ (GHG), their sources and methods of controlling, including ‘carbon trading’, from the viewpoints of ethics and social well-being To discuss the necessity of the utilitarian ethical approach for global emission control vis-à-vis merits of ‘carbon trading’ system as per the Kyoto Protocol

Ethics and the Environment

INTRODUCTION ance ern ce Gov ernan ate Gov nance por Cor orate over nce and Corp ate G erna s ov d nce or nes usi ess an Corp ate G erna B or n d p in Gov usi an ics B ness nd Cor orate Eth ics in usi orp sa Eth s in B usines and C ic s B Eth ics in usines th B E s in ic Eth

1, accessed on 14 October 2011, accessed on 14 October 2011


Ethics in Business and Corporate Governance

HOW YOU ARE AFFECTED, EVERYDAY Healthy airway Nasal cavity Oral cavity Larynx Inflamed airway

Trachea Bronchl


Lungs Affected airway A zoomed-in, highly magnified image of airways within the lungs shows inflammation and mucus build-up as a consequence of traffic emissions

Impact Vehicle exhausts spewed by two-stroke autos in Calcutta begin meddling with the body’s respiratory functions within minutes, but their effects may build up over time, causing irreversible lung damage. Prolonged exposure to high emission levels can damage cells that mop up infectious, allergic and toxic particles from the airways.

Children Damage to airways and lungs from emissions is similar in children and adults. But since children are likely to be exposed for longer time periods over their lifetime, they have higher risks of accumulating long-lerm lung damage, in addition to short-term impacts such as inflammation, persistent cough and exacerbation of the symptoms of asthma.

Ethics and the Environment

These cases show how deep the environmental issues can strike the society, completely jeopardising the life, living and well-being of people, be it in a remote island or in a populated city. Case I depicts how global warming, arising from the carbon dioxide emissions of industries, coal-based thermal power generating plants, vehicles and machineries run on petro-fuels, is causing human misery and destruction. This specific case may be about Sundarban, but the situation is no different in other parts of the world, such as the Indonesian peninsula or the Amazon delta. Global temperature is rising, causing sea levels to rise and inundating low-lying areas of the world; global warming is the result of increasing industrialisation and consequent carbon dioxide emission from industrial plants and machineries of the developed and developing economies. Statistics show that the US emits 20 tonnes of carbon dioxide per capita, Europe around 10 tonnes, China between 4 to 5 tonnes, and India between 1 to 2 tonnes4; vide the graph shown in Figure 7.1. These are per capita figures for 2003. The situation might have marginally improved in the latter years5, but the overall level is far greater than what the ‘sustainable equilibrium’ of the earth can accommodate. This is only one ugly face of the present environmental problem due to industrial activities. Modern societies are irreversibly dependent on industrial products and economies based on industrial growth, but they are oblivious of their responsibility to protect and preserve the environment—essential for the well-being of the human race of present and future generations. Apparently, indiscriminate industrialisation the world over, without much effective control over emission and pollution, is becoming the bane of healthy human society.

3, accessed on 14 October 2011, Foul air hits below the belt—Two-decade study reveals link between male infertility and vehicle pollution; and, accessed on 14 October 2011 4, accessed on 15 October 2011 5, accessed on 15 October 2011

Ethics in Business and Corporate Governance Comparing emissions per capita in tonnes of carbon dioxide 20





8.1 6.8


2.7 0.96

World United Russia Germany UK Japan Italy France China States Source: Energy Information Administration International Energy Annual 2003


Figure 7.1 Carbon Dioxide Emission per Capita in Different Countries, as per the Energy International Energy Study, 2003

Case I points to this direction of ‘social responsibility of the business world’ with a view to minimise industrial carbon emission and control environmental pollution. Case II demonstrates the far-reaching ill-effects and penetration of vehicular pollution into our lives.The case here points to a particular city, but the problem of air pollution is a real threat to civil society in most other cities in this country as well as in the developing world, including China. This pollution is penetrating the social well-being of cities and metropolises the world over, affecting the lives of children and even the unborn foetus. Though serious efforts are being made to control the emissions from cars in most part of the developed world, it remains a serious problem in the developing world. The reason is not solely the economic compulsion of industrialisation, but also populist government policies with liberal attitudes towards the control of industrial pollution or violation of rules and legal dictates. As reported in the Kolkata daily, the government is not rising up to its moral responsibility to protect the health of its citizens and future generations. In this regard, the Consumer Protection Act is also rendered ineffective in the absence of serious intent of the executor of the law and legal provisions. Hence, sufferings of the people and society continue unabated with the implications of possible disability and deformity. Environment protection is a global issue, and all governments have the moral responsibility to act and regulate environmental pollution to protect the health and interests of their citizens. And, within this framework of government acts and regulations, organisations have the responsibility to manage the environment and ecology as a part of good corporate governance. Therefore, the question is: Who are morally responsible for protecting the environment from deterioration? The famous environmentalist William Blackstone, forwarded a view on the environment in 1974—when the issue had only surfaced as being critical to our socioeconomic growth and well-being—proclaiming that ‘the possession of a liveable environment is not

Ethics and the Environment

merely a desirable state of affairs, but something to which each human being has a right’. He summed it up by saying, ‘it is something that others have the duty to allow us to have’. This view is now widely accepted by all nations and forms the basis of studies and analyses of environmental ethics. Thus, Blackstone implies that environment protection becomes a state responsibility; the state has the power to regulate, control and enter into special agreements with other interest groups (such as corporate and society) to protect and improve the environment. Environment refers to the combination of external or extrinsic physical conditions affecting and influencing the growth and development of organisms including the human race. Environmental issues surround us in all conceivable ways, some examples being: air pollution, water pollution, sound pollution, global warming, acid rain, ozone depletion, toxicity, land pollutions, deforestation, solid wastes and nuclear waste, depletion of fossil fuels and minerals, and ecological imbalance. These issues harm not only human beings but also non-human aspects of the larger ecological system within which we live. Environmental issue, thus, raises many complicated ethical and technological questions related to our living, sustainability, well-being of the society, and the way businesses are carried out. However, the scope of this book is not environment management but ethics in environment protection. It is important to understand that, if ethics in environment management of industries and businesses are not maintained and nurtured with great sincerity and commitment, the disastrous consequences of environment pollution may backfire on the industry and business itself—causing immense harm to the well-being of present as well as future generations.This chapter proposes to discuss environmental issues from the standpoint of ‘what causes what effect’ and the ethical responsibility of industries and governments when it comes to preventing environmental damage.

7.1 INTRODUCTION TO ENVIRONMENTAL ISSUES That the presence of industries and consumption of industrial products is causing environmental damages is beyond doubt; the question is, can these damages be minimised so as to strive for ecological balance? If, as the very basis of their existence, industry and industrial prosperity are to serve the cause of mankind, then the people behind the industry are also responsible for stopping or slowing down environmental decay. The society rightfully expects them to be responsible enough not to do anything that harms the interest and well-being of its people. However, all environmental issues need not be directly linked to industries; some are created by the civilised world—arising from the way people choose to live and use industrial products. Let us consider some issues that lend to environmental exploitation: In many poor nations, deforestation occurs owing to the illegal felling of trees for people’s livelihoods; and, to add to this environmental degradation, raw fossil fuels (coal and wood) are burnt for domestic use. On the other hand, in cities and metropolis, increasing dependence on automobiles and machines or equipment run on petro-fuels cause high levels of air pollution. Many civil societies also fail to conserve natural resources like water or fail to recycle domestic waste—aggravating the problem of environmental exploitation.

Ethics in Business and Corporate Governance

However, whatever may be the source of environmental pollution, it has to be controlled and curtailed if damage to living organisms and mankind is to be put to a stop. Thus, it may appear that environmental degradation is the antithesis of industrialisation and industrial development in this materialistic world. Therefore, in today’s world, an ethical approach to ‘balancing the actions of industrial development with those of controlling and minimising environmental degradation’ is essential. Unmindful of the environment, our random industrial exploitations of natural resources, industrialisation around the world, and modernisation of the society have escalated the demand of industrial products and created unparalleled environmental problems—all of which pose a threat to our healthy and safe living in this world today. The very technology that enabled us to manipulate and utilise nature has also polluted our environment and rapidly depleted valuable natural resources and nature that help us conserve and live. A fallout of this situation has led to international power struggles to own and control natural and technological resources in a world where demand far exceeds the supply. This has been a cause of our continued economic struggle and the source of many conflicts in the world. In our pursuit of continued prosperity through industrialisation, the world is becoming increasingly polluted and devoid of natural forests and resources, giving rise to problems like the greenhouse effect, global warming, acid rain, shrinking forest land, mineral depletion, etc. Such a situation has provoked many environmentally related ethical questions, some of which are:


These debates and dimensions should help in bringing out the underlying ethical issues of environment management. This chapter discusses some such issues relating to air and water pollution, global warming, as well as conservation of forests and related matters. Significantly, ‘global warming6’ is drawing the most attention of all the nations, because of the magnitude of the problem it is causing or can cause. Global warming is an effect; the cause is the emission of industrial gases mainly containing carbon dioxide—briefly called ‘carbon emissions’. Carbon emissions cause the ‘greenhouse effect7’ by which the atmosphere traps and holds some of the sun’s energy, warming the earth enough to support life—much like the 6, accessed on 15 October 2011, accessed on 9 November 2009 and 15 October 2011 7

Ethics and the Environment

artificial greenhouse created for plants. Most mainstream scientists believe a human-driven increase in ‘greenhouse gases’ is increasing the effect artificially. These gases include carbon dioxide, emitted by fossil fuel burning and deforestation, and methane, released from rice paddies and landfill sites. IPCC (Inter-governmental Panel for Climate Change) concluded in their Second Assessment Report on Climate Change, 1995 that global temperatures have been rising since 1750 as a consequence of human activities that are producing greenhouse gases. Without any measures to reduce this emission, the earth’s temperature will rise by 2 to 4°C by the end of this century. Scientists predict that the slightest increase in temperature (from the present level) will severely limit fresh water availability in several countries and cause coastal flooding in many parts of the world (refer Case I cited earlier in this chapter). A temperature rise of 2°C will bring disastrous consequences of social, economic and environmental damages the world over, nullifying all industrial endeavours to prosper. While the world has yet to set a global goal to limit carbon emission in the atmosphere, IPCC experts suggest a 50 per cent cut in world emissions by 20508.The carbon reduction projections for some industrial countries relative to 1990 are given in Table 7.1. Table 7.1

Projections of carbon reduction for different industrial countries suggested by IPCC Country/City UK France Germany Sweden Norway California, US City of Toronto, Canada New Mexico, US New Jersey, US US (proposed)

2050 reduction

Relative to

60% 75% 80% 50% 100% 80% 80% 75% 80% 80%

1990 2000 1990 2004 n/a 1990 1990 2000 2006 1990

The IPPC projections for reduction in carbon emission levels show that the major responsibility for the carbon emission control has to be borne by the industrially advanced nations. For example, the USA and Germany have to cut the carbon emission by 80 per cent and the UK by 60 per cent. This is surely going to create conflicts of interests among nations, which is unlikely to be fully addressed by the global bodies. And, in the face of conflicting interests, the environmental degradation and human misery may continue unabated. Furthermore, economists estimate that the cost of keeping temperatures within an acceptable range would be about 1 per cent of the total global output. And this being the direct cost, what this huge loss of opportunity to earn and grow will cost the nations is anybody’s guess. A study9 undertaken by 8, accessed on 19 August 2009 and 15 October 2011 TERI Launches GREEN India 2047 Report,, accessed on 15 October 2011 9

Ethics in Business and Corporate Governance

The Energy and Resources Institute (TERI) in New Delhi found that India is losing about 10 per cent of its annual GDP due to environmental damage and degradation of natural resources. Not surprisingly then, questions are being raised as to who will bear the expense of balancing and improving industrial and human activities for the sake of global equity. Blackstone’s approach to environment as rights to all, points to the reality that it is the responsibility of the states to protect the environment and ecology. However, the magnitude of the problem is such that no single state or nation, or a few companies or individuals, can bring any significant change; it has to be the global and combined efforts of all states, societies and organisations. Given the current level of emissions in the developed world (the US, UK and EU, among other countries), and the projected growth of the largest developing economies (e.g., BRIC countries), no reduction in global scale can be achieved without the cooperation of all, especially the US, the EU, China and India. While world leaders may be contemplating their economic options (what needs to be done and by whom), there is no ethical choice. It is the moral duty and responsibility of all the governments, societies and organisations to undo, or improve over the present situation, something they have been doing very selfishly and perilously and for so long. The moral responsibility of these societies, to protect the nature and environment, has to prevail over their economic calculations of profit and growth. However, challenges of ethics in environment management are not in curtailing profit or growth of industries and business, but in inventing the ways and means to carry out industrial necessities in better and mutually agreeable ways to reduce, eliminate or neutralise emission and pollution. This stand may justify a utilitarian approach to solving the environmental problem in the present world order.

7.2 INDUSTRY AND ENVIRONMENT POLLUTION: A GENERAL VIEW So, how does industry affect environment? Let us consider the following facts: Industry requires land for the setting up of plants and other facilities which leads to shrinkage of cropland or forests. Industry needs more water—leading to falling water tables on the earth’s surface on the one hand, and the discharge of used water that is polluted with chemicals, waste, industrial residue on the other. Industry needs energy and power, which involves burning fossil fuels and oils—leading to depletion of natural resources, air pollution and other related effects like ‘ozone depletion10’ which expose us to harmful effects of ultraviolet (UV) radiation. Industry needs transportation of raw material and goods which involves usage of petro-fuels and leads to air pollution, greenhouse effect and rise in atmospheric temperature.


Depletion of the Ozone layer in the stratosphere can cause increased amounts of UV radiation to reach the earth, which can lead to more cases of skin cancer, cataracts and impaired immune systems. It can also damage sensitive crops, reduce crop yields and stress marine phytoplankton which could adversely affect human food supplies. Refer to, and, accessed on 18 August 2009

Ethics and the Environment

In all, industry is an energy guzzling conversion mechanism whereby raw materials are converted to utility goods—leading to depletion of natural resource and dependence on the production of huge quantity of industrial power—a major source of solid wastes, toxic wastes and global warming. Industries such as power, steel, cement and mining, extraction of ferrous and non-ferrous metals, chemicals, fertilisers and refining are continually producing pollutants like sulphur dioxide, carbon dioxide, carbon monoxide, nitrogen oxide, particulates, etc. These are only a few examples of how industries directly or indirectly contribute to the environmental degradation and pollution. But, industry is essential for material prosperity. The present world order and world economy cannot be conceived of without industries; industry is the major source of engagement and employment of people for their livelihood.Therefore, the solution does not lie in discontinuing industrial growth, but in pursuing disciplined and innovative methods and systems to ensure a drastic reduction (or elimination) of damages to the earth and living beings occurring due to environmental exploitation caused by industrial practices. While the annual reports of many Indian companies may claim their respective intent to create sustainable environmental capital for the nation, they fail to list the exact projects undertaken or results achieved by the companies. Similarly, corporate statements about sustainable environment creation comprise mostly qualitative description of intent rather than any comprehensive and holistic approach to the problem. Considering the serious impact of environmental degradation due to industries alone, governments must come out with stricter environmental laws, and industries should volunteer to limit the environment degradation and pollution even at the cost of profits from business. Business organisations have the moral responsibility to be concerned about the society—whose members are, after all, their chief patrons (by way of consumptions and spending). Environment management is not a simple system of do’s and don’ts; it is expensive, calls for an innovative approach and demands high degree of managerial commitment. Industries, especially in developing countries, are often found to be lacking in commitment and organisational will to control pollution. Despite their commitments, they are seen to be failing in adequately planning for environmental control, and continuing with processes and technology that are neither adequate nor balanced enough to environmental pollution and damage. Many a time, the violation is intentional in an attempt to evade the requirement of added tasks or resources. Such violations are more noticeable in developing economies than in developed economies which have strict social and consumer protection laws with exemplary penalties for failure. Let us consider industrialisation in the Asia-Pacific region, for instance: India is still producing nearly 80 per cent of its energy requirements through conventional thermal power generation.11 According to the Central Electricity Authority of India, as of March 31, 1998, 83 steam plants were in operation in India. These plants generated almost 11 accessed on 21-02-2010: India Power Report Q1, 2010, and Environmental Impact of Emissions from Thermal Power Generation: impact.pdf; accessed on 15 October 2011

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80% of total generated power for the nation. Its disastrous effects on the environment due to release of carbon dioxide and sulphur bearing gases from the burning of fossil fuels, and release of fly-ash in the air, are well known. India’s thermal power stations are known to be the largest contributor of greenhouse gases. Though some efforts are being made to limit emission to permissible levels of sulphur dioxide and nitrous oxide from these plants, and to promote alternative sources of energy (like wind power, solar energy and hydrogen fuels), these efforts have not significantly impacted the national emission scenario so far. Most thermal plants also appear to be disregarding the basics of environment protection, like extensive tree plantation or adopting latest pollution control technology. All this tells us a grim story about the lack of business commitment towards environment protection as well as the absence of monitoring and strict regulatory controls. Similarly, despite pollution control laws, many an industrial machinery and production equipment in India are seen to be belching heavy industrial smoke and dust without much care and control. Smoking industrial chimneys are a common sight when one travels by road or rail in India; as is the sight of commercial and passenger vehicles which may not be fuel-efficient as per global norms, but continue to ply and pollute because of slack traffic authorities and lack of control. The cumulative effect of these uncontrolled industrial activities, in developing countries like India and China, given their considerable contribution to air pollution and global warming, has become the main source of worry and contention globally.

The question is, does this kind of poor environment management indicate lack of industrial commitment or slack laws and regulations in these countries? Studies by many NGOs in the field have found that it is more the absence of moral commitment by the industries, than slack regulations (or regulators), that is the main problem of environment management in India. Industries and nations must take the holistic approach to environment management—taking into consideration all consequential ‘cause and effect’ to minimise damage to society—and not make isolated technological choices. Not only in power generation, environment management in all types of industries—starting from plastic and leather to steel industries—have been problematic everywhere. No industrial or modern activity—using different industrial products and gadgets—can be truly classified as non-polluting; it is just that these activities lend to varying degrees and modes of pollution. To cite an example in this context: A company manufacturing electronic integrated circuits may pollute less or within a limit, in comparison to a leather processing unit or a metal foundry. Yet, the fact remains that pollution is a universal phenomenon associated with and a result of industries—be it manufacturing, construction, distribution and maintenance or service oriented. Similarly, nuclear power generation—believed to be relatively non-polluting and, hence, adopted by many developed countries like Japan, Russia and France—pollutes the air quality far less compared to thermal generation, but is still not non-polluting. Nuclear power technology is also riddled with the problem of effective management of nuclear waste and guarding against accidental radiation leakage, both of which are hugely expensive tasks. The

Ethics and the Environment

Chernobyl nuclear disaster12 in Russia in 1986 is an example of how damaging the failure in dealing with nuclear radiation could be on a locality and society; the region is still not fit for human habitation. There are many instances of radiation leakages at nuclear power plants, which may not have been disclosed due to possible socio-economic repercussions and, perhaps, the secretive policies of some states and governments. Furthermore, even the lighting systems or computers used at home and in offices are not free from polluting tendencies. They leave behind them their ‘carbon footprint13’ that indicate how they lend to the generation of carbonaceous greenhouse gases and emission.

Hence, the task of environment management is neither industry specific nor area specific; it is enrooted in all facets of industrial and social activities. However, the most important aspect of environment management is to appreciate that although nature and natural processes have an in-built capacity to regenerate the atmosphere to support the required ecological balance for our life and living, the problem arises when we exploit nature and ecology beyond that capacity. Modern society’s love for wealth and prosperity the world over may already have, in all probability, far exceeded that critical level of ecological tolerance and balance.Yet, no matter how late, nations across the world have to sit up and take note of their moral responsibility to first bring down pollution levels to a safer level, and then to self-regulate and control pollution with a view to bring about the well-being of all societies, in general, and future generations in particular. Only this kind of an approach would translate into any major change—brought about by the actions of industries to control their emissions and to abide by the (new) norms of environmental protection. It would be unethical for both industries and governments to leave such a task unattended. In view of the danger from unabated emission and pollution facing the nations and societies, all the governments have come out with policies, regulatory controls and laws governing environment protection. In India, too, the Ministry of Environment and Forest (MoEF) launched the ‘Corporate Responsibility for Environmental Protection’ (CREP) charter14 in 2003, aiming to go beyond the compliance of regulatory norms for prevention and control of pollution through various measures including waste minimisation, in-plant process control and adoption of clean technologies. Furthermore, the Central Pollution Control Board (CPCB) and similar boards at the state level are responsible for granting ‘pollution clearance’ approvals and running other checks prior to the setting up of any new industry or construction activity. The process of granting clearance necessitates a detailed examination of the activity or project vis-à-vis the scope of pollution generation, nature of pollution, planning and protection planned in the project for pollution control, effect of the pollution on the locality and society, deforestation, impact on ecological balance, and other situation-specific factors. For example, while all these factors may have to be studied before setting up a green-field steel plant, the construction of a port may, instead, call for a very detailed report on the deforestation and ecology aspects of the project. As 12, accessed on 19 August 2009 and 15 October 2011 A carbon footprint is a measure of the impact our activities have on the environment, and in particular climate change. It relates to the amount of greenhouse gases produced by burning fossil fuels for electricity, heating and transportation, etc. Refer to http://, accessed on 9 November 2009 14, accessed on 9 November 2009 and 15 October 2011 13

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more and more societies and governments take note of the ill-effects of environmental pollution, more awareness is growing globally. The Kyoto Protocol15 is one such significant initiative wherein industrialised countries have come together and committed themselves to stabilising greenhouse gas emissions.

However, environmental pollution is not confined to industrial activities alone; it is intimately connected with the usage of industrial products as well. To reiterate, let us elaborate on the earlier examples (in this chapter) of cars and refrigerators that we all use: Air pollution due to sulphur and nitrous gases released by incomplete fuel combustion in cars and vehicles has become a major concern of modern civilisation. Cities are reeling under the effect of ‘vehicular pollution’ that is leading to a rise in the atmospheric levels of toxic gases and sulphur dioxide, causing respiratory diseases, headaches, etc. Similarly, the use of CFC (chlorofluorocarbons) refrigerators is adding to atmospheric pollution, causing ozone depletion and consequent suffering for mankind. While many countries have banned CFC, it is still being used to manufacture refrigerators or other machines owing to its cost advantage. CFC gases are released during leakages in refrigeration and air conditioning systems or when they are repaired or disposed off; the gas rises rapidly to the stratosphere and ultimately causes a breakdown of the ozone gas that protects us from UV radiation.

Environmental pollution, caused by industries or from the uses and consumptions of industrial products, can be vastly damaging. And the problem is becoming even more aggravated with the increasing dependence of the developed and developing world on industrialisation, for the sake of economic growth. Industries—owing to preconceived notions about the added costs vis-à-vis direct economic benefits—are buckling from the responsibility; governments of various nations are debating who should do what. In the meantime, the problem is only being multiplied and seems to be getting out of hand: According to statistics (Figure 7.1), America emits about 20 tonnes of carbon dioxide per capita of that country, Europe around 10 tonnes, China between 4 to 5 tonnes, and India between 1 to 2 tonnes. In fact, emissions in China and India are increasing every year. And, sustainable global equilibrium requires that the average emission be brought down to about 2 tonnes per capita by 2050. This is indeed a huge task, if at all it is achievable!

Arguably, emissions may not be arising—at least not 100 per cent—owing to industrial operations; some of it may also be as a result of modern lifestyles and societies. However, this chapter concerns itself with environmental issues and deals with measures to control emission and pollution from industries. In all fairness to society and mankind, it is the governments of those countries that are major sources of emission and environment violation, which have to take on a major chunk of the environmental responsibility as well. This would include, setting stringent goals for respective industries, gradually decreasing caps on emission levels, serious 15

The Kyoto Protocol is an international agreement linked to the United Nations Framework Convention on Climate Change. A major feature is that it sets binding targets for 37 industrialised countries and the European community for reducing greenhouse gas emission. Refer to, accessed on 9 November 2009 and 15 October 2011

Ethics and the Environment

punitive measures for violations, economic incentives, and strict and honest monitoring of the compliance. Industries, on their part, must rise up to the challenge, seek innovative measures and improved processes, opt for greener factories and technology, and set up independent agencies for environment ethics and compliance which aim at self-regulation and self-control. Industries in the developed countries especially should take the lead—as they have led the way for industrialisation in the past—for self-regulation; irrespective of what economic incentive they stand to gain or, for that matter, lose. Industries are morally responsibility to bring about self-regulation in this situation of their own making, if they are to save this planet from disaster and human tragedy. In this context, it may be interesting to note that the Government of India is planning to make it mandatory for companies to share information—about their environmental commitments and performances related to new and ongoing projects—with the general public, with the purpose of building public pressure when it comes to the reinforcement of all such industrial environmental goals.

7.3 SOME ENVIRONMENTAL PHENOMENA OF ETHICAL CONCERN Sources of environmental pollution can extend from the basic water we drink, air we breathe, and sound we hear to imbalances in the ecology we are surrounded by. The ecological balance of nature—that has been the source of our continued well-being—is in grave danger. Some important types of pollution—brought about by the emission of objectionable gases and degradation of the environment due to industrial practices and our social habits—are as follows: 1. Global Warming First in the list of environmental dangers, due to its very grave impact on the global climate and marine life, global warming (refer footnotes 1 and 2) is the single most important cause of ecological imbalances with an equally huge potential for catastrophic damage to the planet. It occurs due to the ‘greenhouse effect’ (refer footnote 3), when greenhouse gases like carbon dioxide, nitrous oxide, methane and CFC increase the temperature of the earth’s surface. Greenhouse gases occur naturally to keep the earth’s temperature warm enough to enable organisms and life to evolve and flourish. But, an excess of greenhouse gases in the atmosphere causes gradual increase of earth’s temperature leading to a state when ecology and marine life on the earth is highly disturbed, with extremely damaging effects on mankind. The increase in earth’s temperature will cause the glaciers to melt, bringing about reduced ice formation and increased sea temperatures, changing the ecology, marine life and inundating low-lying areas of the coastal belts. It is reported that average global temperatures are now nearly 1°C higher than in 1900 AD. (Figure 7.2 tracks the rapid rise in global temperature over the years.) With exponential rise in greenhouse gases due to large-scale industrialisation and indiscriminate usage of fossil fuels by the people, the earth’s temperature is expected to rise by another 2 to 3°C during the next 100 years, if things go unchecked. This will flood all coastal zones, displacing millions of people and ruining both villages and cities; decrease agricultural yields, inundating a large percentage of cropland; and change the weather and climate all around the world, creating imbalance in seasonal changes and living conditions

Ethics in Business and Corporate Governance 0.6

Temperature anomaly (°C)

Global Temperatures 0.4 0.2

Annual average Five-year average

0 – 0.2 – 0.4 1880 1900




1980 2000

Figure 7.2 The Rapid Increase in Global Temperatures over the Last Few Decades (global mean surface temperature difference from the average for 1961–90)16

for human beings; among other disastrous effects. Thus, global warming has the potential to bring untold misery and sufferings upon mankind—and whose fault will it be? In addition to reasons such as fossil fuels, vehicular emission, and industrial gaseous effluents, technology-driven human activities also contribute to the exponential increase in greenhouse gases. Let us consider a few examples related to Internet usage: It is an eye-opener to note that, in the US alone, 17 million tonnes of carbon dioxide is emitted due to the consumption of energy used to transmit, detect and delete spam while Internet surfing. The study was undertaken by the climate change consultants ICF, commissioned by the virus removal service McAfee.17 Even after allowing for the fact that McAfee is not a disinterested party in propagating this alarming message—since it also sells spam filtering technology—there is still room for thought. The study indicates that if every ‘inbox’ has a filter, some 75 per cent of the spam-detection-and-deletion energy could be reduced—which would be equivalent to taking out 2.3 million cars off the US roads! No doubt that each spam has a comparatively miniscule ‘carbon footprint’ (0.3 mg of carbon dioxide), but that cannot be ignored if its cumulative effect is considered. The study further indicates that on average, business users of Internet spend energy equivalent to approximately 131 kg of carbon dioxide each, annually, just for e-mails.

This Internet related facts, taken from a recent editorial of a well-known business daily in India, goes to show how we are getting entangled in the worldwide web—literally—of pollution and global warming—not only through industrialisation but also due to acquired habits born of modern-day living. Afraid of the consequences of global warming and the huge costs of controlling the same, countries often take recourse to blaming each other for the cause, rather than committing to 16, accessed on 22 November 2011, accessed on 19 August 2009 and 15 October 2011


Ethics and the Environment

control the greenhouse gas emission. Economically developed countries like the US and Europe, which outweigh the other less developed ones in terms of greenhouse gas contribution, are reluctant to take the lead. Developing countries like China, India and Brazil, which are rapidly adding to carbon dioxide emission through large-scale industrialisation and population growth, are also turning away from the imminent danger. IPCC18, the leading body for the assessment of climate change, established in 1988 by the United Nations Environment Programme (UNEP) and the World Meteorological Organisation (WMO), has been continuously trying to bring a global awareness of this serious threat from environment degradation. The climatic change brings along with it widespread increase in infectious diseases such as dengue, malaria, West Nile virus, hepatitis, etc. as being observed in many coastal cities world over in recent time. These effects will certainly spell doom for the mankind, unless gets checked with all urgency. Global warming is an extremely difficult challenge to meet; perhaps, some experts believe, we have already caused unrepairable environmental damage. According to an UNEP key fact sheet19 on biodiversity, as many as 150 to 200 species of organisms become extinct every day, because of deforestation and other environmental damage like forest fires, pollution, and blockage of natural migration and feeding routes due to roadways and railways. Yet another estimate states that, to control global warming now, the world have to reduce current emissions of greenhouse gases by 60 to 70 per cent—an amount that would seriously damage the present economy-base and economies of all nations! The repercussions of such drastic control, as the current situation demands, are so vast, that only a few nations are likely to endeavour. And, while many nations especially from the developed world are pledging voluntary measures to cut emission, they have done little to actually arrest global warming; which means, voluntary measures will certainly not be sufficient. Environmentalists believe that what is needed is a radical change in lifestyles and values. However, can people accept such changes that may be in total contrast to what they are being told or taught through media, academics, economists and advocates of modern industrial society? Question is, can the greed of a few people be sacrificed for the sake of fulfilling the needs of all? Is it moral and ethical to pursue environmental destruction in our pursuit of material prosperity at present—knowing it will most certainly affect the future generations? These are some questions related to environmental ethics that must be examined and acted upon. 2. Acid Rain20 Like global warming, acid rain is another vicious fallout of atmospheric pollution; it arises from the combustion of fossil fuels like coal, oil, natural gas, etc., releasing large quantities of sulphur dioxides and nitrogen oxides into the atmosphere. Fossil fuels are largely used in thermal power plants, metal industries, coke conversion plants (coke ovens), and public and private transportation units. Their combustion releases sulphur dioxides and nitrogen oxides into the atmosphere, which, when going up, come in contact with moist air to form nitric acid 18, accessed on 15 October 2011

19, accessed on 9 November 2009; and action/10f.htm, accessed on 15 October 2011 20, accessed on 9 August 2009 and 15 October 2011

Ethics in Business and Corporate Governance

the upper strata are then carried down with the rain causing ‘acid rain’. This causes widespread damage to the greens, fishes, forestry, and living organisms. It can also cause harm to human skin and body, a phenomena common in developing and poor countries due to work culture (e.g. farmers who work bare-bodied in the fields). One of the many harmful effects of acid rain is its capacity to contaminate drinking water by leaching down the toxic metallic substances—like lead, mercury, cadmium, arsenic, etc.—from the earth’s surface to the layers of water below it, and to other surrounding water bodies. Let us consider an example of acid rain contamination: In some part of the Gangetic delta of Bengal and Bihar in India, contamination of bore well and tube well water with arsenic, lead and mercury is a serious problem. This reach of poisonous elements in the water below ground level may be the result of accumulation over a long time (hundreds of years) of metallic substances carried by the river water from upper courses and also from acid rain. In many parts of rural India especially water thus contaminated is the only source of drinking water, causing widespread diseases amongst people there (skin and mouth diseases, etc.). The problem is so serious now that UNO agencies, government bodies and NGOs are intensively working in some critical areas to provide water free from arsenic and other metallic pollution so as to minimise further damage to public health. Yet, the problem persists, with newer areas reporting arsenic (and metallic) contamination of water every now and then. Social scientists are afraid that this problem will continue to aggravate due to the widespread use of petro-fuels and heavy atmospheric pollution in the nearby regions.

It is also believed that acid rain has corroded priceless monuments of civilisation like the Taj Mahal in India. A court ruling then sought the closure of all the chemical refineries in its vicinity, so as to stop the harmful effect of chemical residue settling on the white marble monument. More recently, the Kolkata High Court has banned all fuel burning and vehicle parking in and around the city’s famous museum monument, the Victoria Memorial—due to the ability of these fuels to create an atmosphere that is acidic and thick with combustion products. Significantly, the most serious aspect of ‘acid vapour’ is that sulphur and nitrogen compounds produced in one country often travel through air to another country and come down as acid rain there. Thus, it is an international problem that cannot be limited to or controlled by efforts of any one country. For instance, a study has shown that a part of Holland has suffered from acid rain due to acid vapour caused in the industrial belt of Germany; likewise, a part of Canada took the brunt of vapour from the industries of the Great Lakes region in North America. In this way, our ceaseless pursuit of growth through industrialisation—using industrial practices— is creating more and more acid vapour in the air. Environmental ethics demand that industries must control the usage of such technologies that add further misery to mankind over and above global warming. It would be in the larger interest of mankind to invest in or innovate new technologies and methods that can reduce generation of sulphur and nitrogen compounds from industrial combustions or to control their release into the atmosphere.

Ethics and the Environment

Ethics further demand that, at this late a stage of environmental damage, industries should not compromise in spending, researching and innovating with a view to curb and drastically reduce generation and release of harmful gases. Industries must seek the development of alternative fuels and greener technology; efforts should be made to discover commercially viable alternative sources of energy that can replace a large part of fossil fuel burning, which is causing irreparable damage to humanity. 3. Airborne Toxics Industrial pollution also leads to airborne toxics, which arises from indiscriminate release of industrial gases into the atmosphere either due to leakage in the system or as exhaust gases from industrial chemical processes (also known as chemical brew). Many of these gases are carcinogens (e.g. benzene and formaldehyde) or gases that can severely affect human nerves and body systems (e.g. phosgene gas). Death and permanent disability of thousands of people in the case of the Bhopal Gas Leak tragedy (refer Chapter 3, footnote 5) was due to phosgene leakage from the Union Carbide chemical plant. These toxic gases may be less talked about these days, but their release still continues in many parts of the world, affecting the health of many civilians. Studies have shown that living near a chemical plant raises the chance of cancer to more than one in a 1000, due to higher concentration of carcinogenic gases in that locality. Hence, strict control is exercised in many countries when it comes to licensing or locating such harmful chemical industries outside the populated areas. 4. Air Pollution The most common to us, air pollution affects the health of millions of people every year. It is prevalent in all industrialised countries, but varies in degree with the quality of regulations and governance in a country. In India and China, where the economy demands greater and faster industrialisation, the presence of air pollutants is high, and is rapidly increasing every year. This is mostly due to industrialisation on the one hand, and usage of industrial products like automobiles and machinery on the other. In the recently held Beijing Olympic (2008), the Chinese government had to pull out two million cars from their roads; close down hundreds of industries in the vicinity of the Olympic venues; and restrict vehicular movement in the city during that time, to reduce the ‘smog’ effect from automobile exhaust gases and particulates.21 The major sources of air pollution in India are auto-emission and industrial fumes. In fact, most Indian cities carry a much higher level of sulphur dioxide and suspended particulates in the air than the stipulated; air pollution has become a major source of respiratory diseases, especially amongst newborn children. Common industrial causes of air pollution are: (1) Carbon monoxide produced by heavy traffic in cities, highway vehicles and inefficient auto combustion. Presence of carbon monoxide in the air that we breathe can cause headaches, decreased muscular coordination and visual deficiencies. (2) Sulphur dioxide produced by the burning of coal and oil as fuels.This causes respiratory diseases, reduced visibility, loss of vegetation and widespread corrosion of metals and 21, accessed on 19 August 2009

Ethics in Business and Corporate Governance

structures. Restriction of industries and heavy traffic movements in and around Taj Mahal in Agra and Victoria Memorial in Kolkata are due to corrosion by sulphur dioxide in the air. (3) Nitrogen oxide produced by fuel combustion in industrial processes and vehicles on the road. This gas is known to cause photochemical smog, destruction of greens and respiratory diseases in humans. (4) Particulates—a suspension of fine particles (10 micron or less in size) in the air—are mainly caused by thermal power plants, metal processing units and vehicles plying on the road. Amongst its many nuisance values and effects on greens and plants, high particulate levels in air that we inhale can cause serious damage to our lungs. Very common particulate pollutions observed in India are fly-ash and fumes from sponge iron plants, thermal power plants and steel plants. Then there are other pollutants in the industrial air, such as lead and volatile organic compounds, which are immensely harmful to our health. In congested cities, automobiles are said to be the cause of 50 per cent of observed air pollution.22 Industrial pollution mainly comes from thermal power plants, mining and metal refining industries using thermal energy. These sources release tons of gases containing sulphur oxides, nitrogen oxides and particulates into the air. Sulphur oxides when taken into the lung, forms sulphuric acid inside the lung, which damages the linings of the lung and causes diseases like bronchitis, asthma, etc. Alarmed by the very damaging effects of air pollution, many countries have brought about strict environmental legislations to control emissions from industrial processes. It is claimed that a decrease in air pollution would save thousands of lives every year, especially amongst the relatively poor nations. 5. Water Pollution Water pollution is, again, due to industries; more specifically, due to discharge of industrial wastes and effluents into rivers and water bodies; discharge of untreated chemically contaminated water from factories into rivers and canals; drained water from mines containing sulphuric acid and other particulates; dissolved salts; oil spillages; inorganic wastes, etc. Water pollution is an age old problem, but its intensity and diversity has increased many-fold with industrialisation. The range of water pollution now covers water with dissolved salts, to radioactive wastes and vast amounts of organic wastes that are threatening marine life and destroying ecology. Water pollution also includes groundwater pollution due to inorganic pollutants like lead, mercury, etc. that make their way to underground water layers or to water bodies, which is ultimately consumed by people through drilled tube-well water. While the presence of these metallic or toxic elements is ill-known for its harmful nature, it is being increasingly found in drinking water and well water as well. Originating from industrial waste waters (most notably from metal extracting industries, leather and paper pulp industries and others who consume plenty of fossil fuels), and released to the ground or rivers, sources of water pollution are very diverse—in fact, as diverse as their effect on organisms and humans as this example indicates: 22, accessed on 19 August 2009

Ethics and the Environment

Arsenic, a poisonous chemical, is known to be causing havoc in the Gangetic Delta in India, affecting over 350 million people in Bengal, Bihar and Orissa23. Arsenic compounds carried by the rivers from the Himalayas, deposit the chemical on the delta soils, which then gets leached by rains and residues of chemical fertilisers used in agriculture and, thereby, enters into the underground water table contaminating the accumulated water in the table-bed. This water, when pumped out by tube-wells for drinking, contains more than tolerable limits of arsenic that cause various skin diseases and also the dreaded cancer. While governments and NGOs are trying to help purify such water, the effect of such moves to limit arsenic levels in drinking water is negligible due to the large-scale dependence of rural people on tube-wells and bore-wells.

Surface water in most parts of the world is equally polluted due to the release of industrial and human wastes, oil spills, dumping of solid wastes, acid rain, and usage of chemicals and chemical fertilisers in fields. In nature’s cycle of constructive events, fishes and worms in the water—that have long since acted as scavengers of such pollutants in surface water—are also being seriously affected by the presence of organic and inorganic pollutants in the water. In India, most river water and water bodies are too polluted to drink due to the use of chemical fertilisers in the fields, and indiscriminate release of waste waters from industries into the rivers. The rivers Ganga and Jamuna in northern India are so polluted that many do not recommend bathing in these river waters—as is called for in certain religions and faiths—due to severe industrially caused pollution and contamination. Despite environmental regulations in India and funds made available by the World Bank (to check river pollution), the rivers continue to be polluted and cause concern about the availability of safe drinking water. Even seas and oceans are not spared from water pollution in this modern era of industrialisation, due to oil spills from ships and oil tankers, and the dumping of radioactive wastes, that affects marine life. Today, as a result of widespread water pollution, more than 1000 million people in the world suffer due to the lack of safe drinking water and water-related diseases, especially in the poor nations.

Besides the types of pollution discussed thus far, there are pollution problems arising from the scourge of solid waste disposal and toxic substances on the land—which, too, finds its way directly into underground water tables. The dumping of nuclear and electronic wastes is the other issue in pollution control. E-waste, as it is commonly known, is generated from large-scale consumption of these waste products which are often illegally dumped and pollute the ground soil and ground level water quality. The Manufacturers Association of Information Technology (MAIT) of India states that, in 2008, about 3.3 lac tonnes of electronic waste was generated in India alone, which has been mostly dumped into the rivers, canals, landfills and sewage drains.24 Furthermore, chemicals and chemical reaction products that corrode such dumped waste seep 23, accessed on 19 August 2009 and 15 October 2011

24, and 037141.pdf, accessed on 16 October 2011

Ethics in Business and Corporate Governance

deep into the ground and add to the damage of ground-level water quality. E-waste is a matter of deep concern in the society today because of its toxic and carcinogenicity. Toxic substances in these wastes may include cadmium, lead and mercury, and the carcinogenic substance polychlorinated biphenyls (PCB). Protection of environment and pollution control from this viewpoint has also become a major threat to the environment and society—looking at the way world consumption of industrial products of this category is rising. It is, of course, not because of the industrial growth but because of the failure of industries to regulate (or recycle) the waste thus generated or discharge pollutants into land, air and water. Open seas have become the general dumping ground of all countries, where extensive amount of polluting materials and E-waste is dumped every year endangering, as we discussed earlier, both marine life and ecology. It seems the world is losing its will to check and control such disastrous moves. For example, a recent report of United Nations Framework Convention on Climate Change25 (UNFCCC) revels that total greenhouse gas emission of the developed countries actually increased during 2000–05—a clear indicator that the situation is far from being under control. Much needed innovation in controlling industrial pollution, or methods of handling the increasing amount of pollutants of diverse nature is still greatly lacking. Ethics demand that, for the sake of humanity and well-being of the society and future generations, industries and governments must pay heed to environment protection with greater urgency and commitment. Industry and industrialisation is a necessity in modern times, but that should not mean continuation of our past mistakes and lack of will or ways to adapt to our present-day necessities. Therefore, industries and nations must join hands to develop new energy-efficient processes, promote maximisation of renewable energy sources, and provide affordable technology for pollution control especially in the developing nations where industrialisation is just about to increase, to eliminate poverty under the present global economic system. More developed economies like the US are known to be using conventional energy many more times than developing countries like India, due to large-scale industrialisation. Equity in global treatment demands that these relatively poorer nations must not be forced to unilaterally cut their emission proportional to the size of the state or the nation.The developing world needs industry, and the developed world must provide them with energy-efficient, renewable and affordable technology in order to set a balanced economic order in a world free from the destructive threats of global warming and hazards of water pollution. Ethics of protecting ecology and environment cannot be forced upon any one or few nations; they have to be concerted and joint efforts of all the countries in the world. And it calls for the spirit of ‘distributive justice’ in solving this mammoth task. Thus far in this chapter, discussions on types of pollution, their causes and their ill-effects are aimed at highlighting the hazards of environmental pollution on mankind, and how things are gradually going out of control. At the same time, ethical tasks and the essentiality of controlling these pollutions have been touched upon. If ethics is about guiding and regulating human and industrial activities for the well-being of the society, then there is no greater urgency now 25, accessed on 9 November 2009

Ethics and the Environment

than ever before when it comes to contributing and controlling pollution and environmental degradation. As things stand now, it would be a folly for any country or industry not to take the responsibility for environment protection and selfishly focus only on economic benefits. While economic benefits and profits are certainly an important indicator and measure of growth for business as well as the society, this cannot be at the expense of environment. The ill effects of pollution and environmental decay are too serious and grave for the well-being of human society. Therefore, for the sake of industrial growth and prosperity in a sustained manner, business enterprises and industries have to take their moral responsibility of not meddling with the environment and, in turn, not causing irreversible damage and destruction of the society. Protecting the environment is their moral duty to the society—whose members, in reality, fuel the industrial and business growth through their economic power and consumption. In a free market environment, a business exists for its consumers, and not vice versa.

7.4 ETHICS OF CONTROLLING ENVIRONMENTAL POLLUTION It is important to appreciate that environment—like the air and water—is generally regarded as the common property of society. Based on this concept, industries all over the world, and other users of the environment, felt no specific obligation to maintain the quality. Industries dumped waste and chemicals into the seas and lands till a time they were forced to stop. DuPont, the largest chemical manufacturer of the world, is reported to have dumped thousands of tons of chemical waste every month into the Gulf of Mexico at the US coast until it was forced to stop.26 Similarly, it is regularly reported that industrialised countries are freely dumping objectionable wastes and gases around the African coast, causing untold miseries to the natives in these poor countries. This dumping is reportedly being continued without the care of developed nations. Sadly, the scenario is no different even for inland pollution by the industries; industries all over the world released objectionable gases and particulates into the air, causing grave air pollution especially in the industrial areas.

In the past, industries have not shown much concern for the rightfulness or ethics of such harmful actions; it is only now, with the enactment of laws or the commitment of good corporate governance, that they are being forced to attend to the problem. Another thing about environment is that, industries got used to looking at the environment as an ‘unlimited source of availability’ and each firm felt that its contribution to pollution is not significant enough to warrant specific actions. In India, hundreds of small foundries in Agra (Uttar Pradesh) and Howrah (West Bengal), developed during the early days of India’s industrialisation, dumped huge amounts of waste waters into the rivers Jamuna and Ganga, causing serious pollution and contamination of the water of these important rivers that feed millions of people along their course.

26, accessed on 15 October, 2011 and =888&dat=19740913&id=4OklAAAAIBAJ&sjid=THkDAAAAIBAJ&pg=6947,1972300, accessed on 15 October 2011

Ethics in Business and Corporate Governance

Perhaps, industries felt that river water was unlimited and their actions could not really be a significant cause of any damage to such a vast, unlimited source. When every industry takes recourse in this reason, the combined effect becomes enormous and potentially disastrous. The capacity of air and water around an industrial belt soon exceeds the safe tolerable limits, and these free and unlimited resources like the air and water become seriously contaminated and deteriorate rapidly. Thus, industry and industrial activities give rise to serious pollution of the resources that both society and industry have equal rights to enjoy. Ethics of duties and obligations do not permit any destruction of common property, especially when those properties are so essential for living and sustainable growth of any organism or mankind. However, as mentioned earlier, industry alone is not responsible for environmental pollution; it also results from industrial product (consumption), human waste, habit of disposing, etc. Put simply, environmental pollution occurs due to modern day lifestyles and social habits. For example, immersing corpses and unburnt dead bodies in rivers, a practice prevalent in many parts of India, pollutes water. Thousands of clay idols, immersed in rivers during certain religious festivals, are also a common cause of water pollution in India. These idols are made of toxic chemicals and paint which pollute the river water, making it unsuitable for daily usage. Come to think, all of us are lending to pollution in some way or the other; and the problem only multiplies along with the population. While the population explosion puts a severe strain on air and water resources; pollution is further accentuated by the concentration of population in certain areas, countries and regions of the world where industrialisation is also more. In cities and urban areas, the pollution problem is more serious than in rural regions because of denser populations and higher consumption of industrial products, particularly the use of automobiles. High population density and urbanisation multiply pollution problems, affecting the health and well-being of people in those areas. Thus, just as the sources and nature of pollution are varied, approaching their treatment and regulation also demands an equivalent variety of solutions. However, the scope of our discussion is not pollution treatment but the ethical issues that arise as a result of the pollution caused by industries and commerce. It is within the duties and ethics of agencies—responsible for causing, promoting or harbouring environmental damages to resources like air and water—to stop or control pollution, as well as regulate and compensate the society for all the damages or losses. Industries and governments must find the ways and means to do so no matter how difficult it proves to be in a materialistic world order. If governments are the custodians of the well-being and safety of their populations, they must act meaningfully to bring about an end to environmental damage by appropriate regulations and control of the causes. In this context, it would not be out of place to mention that the world has shown more concern about the proliferation of nuclear weapons (and control thereof)— perhaps because of the more obvious nature of their destructive power—than for the control of environmental pollution.What is being overlooked is that environmental damage and pollution are silently but steadily destroying people and resources and setting death traps for the future generations as well. It is only because the harmful effects of air and water pollution are not immediately visible—while it is easier to visualise the total and utter destruction that nuclear weapons can cause—that industries and governments are often lacking in urgency to attend to this potentially dangerous issue. Ethics of governance demand an end to this dangerous

Ethics and the Environment

journey at the cost of innocent people in society. Industry, state, society and people have to join forces to resist the indiscriminate practice of polluting the so-called free resources like air and water. Organisations and scientific bodies must also come together to find alternative solutions for energy—other than the mass-consumed petro-fuels of today—and rid our planet of the single-most significant cause of pollution. Innovative industrial processes, disciplined industrial practices and stricter environmental and deforestation laws may help in reducing the present levels of environmental pollution. Even an improvement of 3–5 per cent annually—and over the next few years—may extend the dateline of global disaster (due to environmental degradation) by a couple of centuries. In what could constitute a start, many experts opine that large-scale tree plantation and reforestation efforts by the industries and governments may partly neutralise the ill-effects of gaseous carbon dioxide emission (the effect of which has been discussed under ‘global warming’ earlier in this chapter).

7.5 ETHICS OF ECOLOGICAL PROTECTION Ethical issues due to pollution problems can be best examined in consideration of the ecological system within which we live. Ecology is an interrelated and interdependent set of environmental factors within which organisms and all living beings live, evolve and work for supporting and creating sustainable nature and environment in the earth. Most useful organisms that control viruses require a regulated temperature (generally up to and about 35°C) to survive and grow, which is provided by the sun and seasonal changes. With increasing temperature and humidity, these organisms tend to die, and viruses tend to grow faster, causing the spread of many diseases amongst people. With increasing discharge of greenhouse gases that cause global warming, there is climatic change and imbalance in the temperature cycle, which in turn increases the scope of viruses and, hence, infectious diseases amongst people in the affected areas.

Thus, the ecological cycles of sun and season are essential to support living organisms, which, in turn, protect us from viruses and related infections. However, all these naturally occurring ecological phenomena are, in turn, dependent on our ability to control the emission of greenhouse gases. Furthermore, global warming due to the greenhouse effect may flood coastal areas and change the course of sea current leading to changes in seasonal effects in some places; all of which, in turn, changes the climate of a place or region for the worse. In an ecological system, various parts of the system are interdependent and linked to each other; activities of one of its parts influence all other parts in the system. Therefore, the survival of each part depends on the survival of other parts in the system—a fact that thrusts responsibility on human society and community to protect ecology as a moral duty. Being a part of the human society, business and industries have to share this responsibility by leading from the front. Business organisations depend on the natural environment—which is ecology dependent—for their material resources (energy, land usage, seas and rivers for logistical support, etc.); and that environment, in turn, is affected by the commercial and exploitative activities of those very organisations.This is the other face and other cycle of business. Therefore, for their own surviving strategy, business enterprises must

Ethics in Business and Corporate Governance

commit to the ethical task of protecting the ecology and environment. While our industrial progress may often overwhelm us, this material well-being is only one side of the picture; ecological imbalance and environmental degradation caused by industrial practices and activities is the other grim view of the same picture. Thus, for the sake of their own long-term survival, business organisations must proactively implement steps and innovative measures to control and minimise the ongoing damage to the environment. Ecology is not only about human beings; it is also about non-human parts of the larger ecological system. Each part in this larger system is interdependent and important—although it ultimately works out for the benefit and growth of human beings in the ecosystem. Therefore, it is our moral duty to recognise the ethical responsibility to protect even the non-human parts of our ecosystem, if only for the sake of our own welfare. Many environment philosophers opine that ecological ethics should be based on the fact that the non-human parts of ecosystem deserve to be protected for their own sake, regardless of whether we are able to discover their beneficial effects on mankind. On the basis of this belief, ecological ethics—rules of ethics in preserving ecology—state that: (1) The well-being and flourishing of human life on earth are as important and valuable as that of non-human life on earth—irrespective of the usefulness of one for the other. (2) Humans have no right to reduce or endanger the richness and diversity of non-human life, except to satisfy their vital needs for survival. (3) The present human interface with—and exploitation of—the non-human world is excessive and the situation is rapidly worsening. (4) Policies of the society, governments and business in connection with non-human world must, therefore, be changed. This change will affect the basic economic, technological and ideological structures of the society—and the resulting state of affairs—will be vastly different from the present. (5) The ideological change is mainly that of appreciating quality of life, rather than adhering to increasingly materialistic higher standards of living. (6) Society and business have an obligation directly or indirectly to participate in the attempt to implement the necessary changes in structure, ideology and attitude. Thus, ecological ethics demand that we, the human beings, bear the duty and responsibility to respect, protect and preserve ecology of the earth, irrespective of the fact that the pertaining ecology is human or non-human in nature. These ethical claims and duties have significant implications for business activities that affect the environment. Here is one such case in point: In India, whether it is constructing the Narmada Valley Dam by destroying forests and ecology, and displacing thousands of people, or the construction of a new automobile manufacturing unit on a high-yield cropland that changes the very character, livelihood and ecology of that place, has to be examined from even the ecological and socio-economic viewpoints, and just not be considered from the prosperity aspect of a materialistic society. Organisations must make ‘environment policies’ an intrinsic part of their plans and operations; so as to promote both, large-scale (re)forestation of degraded land and the preservation of nature.

Ethics and the Environment

An ethical approach and commitment to such issues (like industry versus sacrifice of forest or agricultural land that often come up for debate in developing countries like India) can further help in balancing and changing ideology and action, with a view towards conserving the ecology and the environment.

At times, animal lovers campaign for the ecological ethics of protecting animals or for cruelty against animals; in the sense that the suffering of animals must be considered equal to that of human beings. While one could argue for and against this aspect, the fact remains that animals are a part of the ecology and their living and growing is not only valuable to them but also to us. The cycle of our dependence on birds, animals, flies and other living species on the earth may be quite complex to understand, but it certainly cannot be denied. Therefore, it is our ethical duty not to destroy their habitats or places where they live and grow, which are a part of the larger ecosystem. Raising animals in human localities, often in painful circumstances, to use them as food or for agriculture (as prevalent in many poor countries), has been also criticised from the ethical point of view. Some environmentalists give in to the broader idea that the life of every animal itself lends value to the ecosystem, notwithstanding human beings’ interest in their existence. Such an approach obliges us to help animals to live and grow in natural and non-painful conditions; yet, it does not always forbid their usage as food (or for the purpose of scientific or medical research) even though, at such times, human interest overrides animal rights. Attempts to extend such a non-utilitarian view—about respecting and protecting the rights of non-human aspects of the ecosystem—have many opponents. Notwithstanding, ecological ethics bring out our duties and obligations towards nurturing nature with all its characteristics and qualities, and link us to the notion of ‘benchmark’ human virtue and character. Ideals of ecological ethics convey to mankind that nature’s integrity, stability and beauty must be preserved for the sake of the larger ecosystem as well as our own interests.

7.6 RIGHTS, DUTIES AND CARE IN ENVIRONMENT PROTECTION Blackstone, in his path breaking ideology stated27 ‘the possession of a liveable environment is not merely a desirable state of affairs, but something to which each human being has a right’. In summary of his view, he said, ‘it is something that others have duty to allow us to have’. The concept is widely accepted now, including by the legal system, and forms the basis of the ethical approach to environment protection. By accepting this, we agree to have a correlative duty of not interfering in the others’ rights to a liveable environment—while exercising our own rights. Here’s how: If deforestation of a huge track of land (as is happening in the state of Orissa in India) for the purpose of setting up an industry interferes with the liveable environment of the local people, then they have the right to protection or suitable relocation. Similarly, people affected by the construction of the Narmada Valley Dam or, for that matter, by the SEZ (Special Economic Zone) created in the coastal regions of India, have the right to seek a liveable environment. Society, business enterprises and governments should accept this stand as their correlative duty. 27

Philosophy and Environmental Crisis, William T. Blackstone, University of Georgia Press, Athens, 1975

Ethics in Business and Corporate Governance

Social scientists observed that disputes over such projects primarily arise when we tend to overlook this duty and responsibility, and try to assert and exercise ‘rights’ in the guise of some legal proviso of public utility. Blackstone argued that a person has the moral right to a thing when possession of that thing is essential in permitting him or her to live a human life, i.e., in permitting to fulfil his or her capacities as a rational and free being. Environment is one such thing that is now fully established as essential for allowing us to fulfil our human capacities. Hence, the right to liveable environment is a legal right for human beings. Its violation or defiance by any agency —be it an industry or a government—is morally wrong, illegal and unethical. Blackstone goes further to state that this moral and legal right should override people’s legal property rights, in order to limit legal freedom under the guise of property rights, and thereby engaging in practices that destroy the environment. He defends the rights to liveable environment as fundamental to our living; any curtailment of it would make us lose the very possibility of human capacity and exercise of other rights such as rights to liberty and equality. So deep was the argument in favour of ‘liveable environment’, and wide acceptance of this approach, that many countries and states have now granted environment rights to their citizens. It is legally accepted that the people have a right to clean air, pure water and to the preservation of the natural environment. Blackstone’s arguments provided a rationale to limit property rights for the sake of human rights to clean environment.

Blackstone’s views establish the rationale for environment control, but offer no practical and meaningful solution to some pressing environmental choices of the modern materialistic world; such as: how much control is needed; who is responsible for protecting the environment; how much protection of environment or control of pollution is required to assure liveable environment; who will bear the cost; etc. Considering that a complete control over pollution and protection of environment will mean the closure of many existing industries, curtailing further industrial growth, and loss of thousands of jobs, it is not always practical or logical even from the utilitarian point of view. Hence, many countries have chosen the practical approach to balance the decision by analysing cost and benefits of controlling pollution to a level that does not endanger living beings and neither does it impose a total ban on pollution (that may stall or slow industrialisation). A total ban on pollution will not only prove to be very costly, but will also be unnecessary considering that nature has, to some extent, its own ecosystem within which to recycle and regenerate the environment. What may be required, here, is ensuring and maintaining a level of environmental purity and cleanliness that supports healthy living and growth of human beings as well as of organisms in the larger ecosystem. A utilitarian approach to pollution control is, thus, necessary. Based on this utilitarian and rational approach to environment management, governments and states are responsible for enacting regulations and laws for clean air and pollution control, and for enforcing the same. Companies and industries are to comply with the required laws and regulations with a view to the welfare of society and preservation of rights to clean air, pure water and environment protection. Therefore, pollution control methods and levels should be based on the rational criteria that ensure safety for the welfare of the society, along with rights to clean air and water required for

Ethics and the Environment

healthy life and living. This may justify different treatments to pollution control—depending on the potency of the problem, or the level of danger to society—and the cost of control. This may justify different approach to pollution control—depending on the potency of the problem, or the level of danger to society vis-à-vis the cost of controlling the pollutions. From this angle, methods of environment control and handling that are excessively expensive may have to be reconsidered for alternative methods that are practically feasibility—despite the fact that such alternative methods may still leave some scope of damage to ecology. For example, treating nuclear waste to make it harmless would be a very expensive procedure; hence, an alternative route of handling it—by simply dumping in the sea in a limited way— may have to be considered. While this method might also contribute to ecological damage and could, hence, be objectionable, it should still be borne by the society as the least damaging solution.While such special consideration may be applicable to some special kinds of pollutants, a ‘cost-benefit’ base approach to removing pollution of other categories beyond a level should be practical. Figure 7.3 is a generalised picture of the rising cost of removing the pollutant visà-vis benefit from the removal of the pollutant; the actual cost or benefit may differ from case to case.


Cost of removing pollutants

Percentage of pollutants removed

Percentage of pollutants removed

Figure 7.3 The Costs and Benefits of Pollution Control

Nonetheless, it goes without saying that pollutants dangerous to human life must be removed or controlled at any cost. This is explained with the help of contrasting examples: For example, removing the last traces of cyanide from water discharged from a chemical plant would be essential at any cost for human life, but the control of bio-dissolved oxygen in discharged water, necessary to protect plants, could be analysed from the cost-benefit aspect, with reference to standards allowable by the nation. Thus, from the utilitarian point of view, there is a compromise in this approach to pollution control. However, social and retributive justice demands that continuous efforts should be made to shift the cost-benefit analysis to the right (of Figure 7.3) with the help of innovative and technological measures. To some extent, this justifies all the efforts made by various nations to develop newer, more efficient devices to control environmental pollution. In India, there is a national policy to encourage manufacturers of pollution control devices, which offers them considerable tax incentives and government support. However, it must be noted that these practices and approaches are certainly not based

Ethics in Business and Corporate Governance

on the notion that people have absolute rights to the environment, but on a more utilitarian approach to the environment and in justification to the notion of ‘partial control’. There are other views to this approach of partial control, some of which argue that the true cost of production (of goods and services) cannot be arrived at, without taking into consideration the cost incurred by the industry to remove pollutants—otherwise, there will be a gap (hidden cost) in the cost-benefit analysis. This, in turn, can result in economic loss to the society and a decline in the economic welfare of society. Therefore, there should be a line of conduct by which an individual or business enterprise avoids pollution; and, thus, cause no harm to socio-economic welfare. This is the utilitarian approach applied to the cost-benefit analysis in the decision concerning pollution control and acceptable levels of pollutants.What it implies is that, for an ethical decision, pollution issues should be examined from the perspective of: (a) own internal cost; and (b) external cost to society. These costs implications, both internal and external, are explained here: A thermal power plant consumes certain amount of fuel, labour and equipment to generate a kilowatt of electricity. This adds up to the internal cost, borne by the industry. But, the process of generating the electricity in a thermal plant also produces certain amount of flyash, which not only pollutes the environment but also settles on the nearby fields. Now, to use this land for cultivation, it is necessary to remove those settled particulates. This adds up to the external cost, which is borne by the landowner or farmer. The industry does not pay for it. This is the attached external cost that has to be, ultimately, borne by society.

Thus, for economic correctness, it would be necessary to understand the total social cost, which is sum total of the internal private cost to the company and the external cost to the society. If a producer pays for all the costs or no external cost is involved in manufacturing a product, then the producer’s cost and the cost to the society are the same. Thus, this approach shows the fact that, in most cases, an industry’s private cost is always lower than the cost to the society; whether the pollution is localised (as in the case of thermal power generation) or general (emission of greenhouse gas that causes global warming). Pollution always imposes external costs—the cost which the producer of a product or the person who caused pollution does not have to pay. However, this situation does not impose any compulsion or discipline on the producers or industries and, therefore, results in a loss of social utility. This implies that the environmental pollution caused by industrial indiscipline is a violation of the utilitarian principles that underline the fair market system. This stand raises the question, is it ethical for industries to exploit the governing system of business that allows them to pollute the environment at a heavy social cost? Should the industries not have the duty of care for the society, or the society has the right to call upon a halt for such damaging pollution? Figure 7.4 illustrates the necessity of balancing the pollution control strategy with that of various environmental issues and concerns. The underlying principle is: Industries should be guided by the social rights and necessities for sustainable living rather than ease of control and advantages of costs.

Ethics and the Environment Environmental pollution control issues: • Safety and welfare of the society, • Rights to clean air and water for health, • Sustainable ecology for all organic living beings Pollution control Strategy depending on: • Potency of problems, • Danger to the society, • Internal cost of control to the company vis-a-vis external cost to the society for partial control • Economic loss to the nation (due to hidden cost)

Figure 7.4 Ethical Balance of Environment and Pollution Management

One such attempt to internalise the cost of pollution (reflected in the company’s balance sheet) is the ‘Carbon credit’ system28 introduced under the Kyoto Protocol agreement (refer to footnote 12). Simply put, it is a permit that allows its holder to either emit a ton of carbon dioxide or trade that permit to someone who had to control carbon emission within a certain limit but had exceeded that limit due to circumstances of the business. Credits are awarded to countries or groups that have reduced greenhouse gases below their emission quota. Thus, the carbon credit system attempts to introduce a self-regulated economic package to operate business system that involves greenhouse emission and causes global warming. This may give an idea if the external cost of pollution is internalised by a producer, the industry will have the right to pollute the environment. But, it cannot be agreed with, because justice lies in preventing and not in compensating for the wrongdoing. Moreover, (a) cost of pollution cannot be accurately estimated; (b) the extent of damage due to pollution in area operated by many industries cannot be clearly earmarked and ‘cause’ located in one place may create ‘effect’ in another place; and (c) pollution to environment like air and water (that is public body and utility source), which is freely accessible by many cannot be actually compensated for.


Carbon credit is a permit that allows the holder to emit one ton of carbon dioxide. Credits are awarded to countries or groups that have reduced their greenhouse gases below their emission quota. Carbon credits can be traded in the international market at their current market price.The carbon credit system was ratified in conjunction with the Kyoto Protocol. Its goal is to stop increase of carbon dioxide emissions. (For details, refer to, accessed on 15 October 2011 and http://, accessed on 15 October 2011.)

ics in Business and Corporate Governance

pollution control devises at self-costs, so that society is not economically burdened with the hidden cost due to pollution.The carbon credit system is a market-operated business package that provides economic rewards to industries producing less pollution. It is a method of forcing the internalisation of cost for pollution in order to promote self-control. In that sense, it also brings fairness into the market mechanism in conformity to the utilitarian approach, on the one hand, and serves the end goal of eliminating or minimising the disastrous effects of pollution, on the other hand. Carbon credit system appears to be a good double-action marketable instrument for controlling greenhouse gas emission; however, its success will lie in its effectiveness in truly bringing down pollution and emission in the world. Many environmental ethicists have started questioning its usage more as a trading instrument than as an object of emission control, especially in the developing countries where the pressure on and for industrialisation is high and the employable capital is scarce. Nonetheless, the utilitarian approach to handling pollution by internalising the cost of control would be consistent with the requirements of distributive justice and equality. Hence, it should be ethically acceptable to the society. This approach of internalising costs of pollution is also in general agreement with the retributive and compensatory elements of justice which demand that those who are responsible for and benefit from an injury should bear the burden of rectifying the injury and compensate the injured. Acceptance of this ethical approach to controlling pollution answers the question as to whose duty it is to curb and control the environmental pollution. The approach implies that: (a) pollution must be curbed and controlled either by national or international actions; (b) the costs of control should be borne by those who cause pollution and who have benefited from the activity that caused or generated pollution; and (c) the benefits of pollution control should flow to the society. While business and individuals perform this duty towards pollution control, the government plays the role of a facilitator, by enacting appropriate laws and regulations, providing proper incentives, and by administering and controlling the implementation and practice. However, protecting the future generations and children—who are most vulnerable and may have to bear the heaviest cost if things go wrong in a nation’s efforts to control pollution—should not be compromised by the choice of alternatives. Choices for environmental management—by approaching it in calculative and rationalistic ways—should not lead to further environmental crises. The possibility arises when utilitarian thinking assumes that nature has to be measured and used efficiently by the society, whereas theories based on rights view human and other entities in their individualistic terms and ignore their relationship with the rest of nature. Ethics demand that the society we live in must consider these aspects of environment rights and balances. Ethics of caring requires that pollution management and conservation are guided by the principles of caring for and nurturing our relationships with nature and living things. The society has an obligation to conserve resources for future generations as well, because they have an equal right to the already limited natural resources of this world. Social scientist John Rawls argued that, although it may appear unjust to impose a disproportionately heavy burden on the present generation for the sake of future generations, it is equally unjust for the present generation to leave

Ethics and the Environment

nothing for the future generation. By extending this statement, he claimed that justice demands that we hand over to our immediate successors a world that is not in a condition worse than the one we received from our ancestors. Our duties and obligations to environment control and conservation come from the standpoint of such a just and rational approach, which implies that industries and businesses have the ethical responsibility to act cautiously in their environment policies and practices so as to maintain an equilibrium state of pollution, which is tolerable by mankind and not harmful to children and the future generation.

7.7 ‘CARBON CREDIT’—A UTILITARIAN APPROACH TO GLOBAL CONTROL OF GREENHOUSE EMISSION If protection from pollution and environmental degradation are the rights of individuals, then states and nations are duty-bound to devise means and mechanisms to control and conserve the same. One of the concepts that emerged from the utilitarian and rational approach to pollution control is to internalise the costs of pollution from industries and nations. Guided by this principle, the Kyoto Protocol for climate change control, under the charter of United Nations, introduced an effective system for global control of greenhouse emission—a critical measure of air pollution—under the design of ‘carbon credit’ (refer footnote 23). The carbon credit scheme attempts to address the gravest challenge to environment protection that comes from greenhouse gas emission, and causes global warming with disastrous effects. Thus alarmed, the Kyoto Protocol, agreed to by all industrialised nations and the EU countries introduced a unique market-based economically tradable instrument called the carbon credit system to effectively reduce emission of greenhouse gases. In effect, the initial credit is allowed to countries or groups that have reduced their greenhouse gases below the permissible emission quota, which are then traded in the market as per demand by any nation or group who are lagging behind in their emission control objectives. Thus, the instrument works to balance the emission level globally and help in achieving a globally set reduction level. The Kyoto Protocol thus presents countries with the challenges of reducing greenhouse gases and storing more carbon, and, thereby, provides an opportunity to make money by trading surplus credits. The Kyoto Protocol—signed in 1997 but in effect from 2005—binds all industrialised nations to a commitment to reduce greenhouse gases by an average of 5 per cent over the 1990 levels during the five-year period from 2008–12. The protocol treaty binds the nations to their targets of greenhouse gas emission primarily through their own internal and national measures, while also providing a market mechanism that facilitates interlinking of national and global controls. The Kyoto mechanisms are: emission trading (also known as carbon trading), clean development mechanism (CDM), and joint implementation (JI). In fact, carbon trading for surplus credit is facilitated by the CDM and JI mechanisms which are aimed at stimulating green investments and helping parties to meet their emission target in cost-effective manner by internalising the cost. As per the protocol, a country’s actual emission has to be monitored and precise records of carbon trading have to be maintained. This has to be done in a two-tier system: (a) national registry system to track and record transactions by parties under the Kyoto Protocol mechanisms; and (b) international transaction logging at the UNFCC secretariat at

Ethics in Business and Corporate Governance

Bonn, Germany from the annual emission reports to be submitted by nations and parties related to carbon trading transactions. If an interest group in a country plants enough trees to reduce carbon dioxide emission by a ton, the group will be awarded one unit of credit. Now, if an industry that is supposed to limit its emission to 10 tons but actually produced 11 tons—either due to increased production or owing to a temporary setback in its pollution control unit—then that company can buy one unit of credit from the former interest group and compensate. This ‘buying and using’ trade system can be availed within a group, a country or internationally.

The system works on the basis of carbon footprint—an assessment of carbon dioxide emission from the energy consumed by a project, product, activities of individuals or an industry. Carbon footprint has been defined—as per UK Carbon Trust 2008—as: the total set of greenhouse gas emission caused directly and indirectly by an individual, organisation, event, project or product. Somewhat similar to tracking pugmarks of an animal, the origin of emission-able carbon can be traced by carbon footprint left in all activities; the success of carbon trading depends on how accurate the carbon footprint assessment is. There are carbon footprint calculators available in this trade, which can indicate factors of potential emission and value of carbon footprint. Some examples of activities that give rise to emission-able carbon and which can be traced through carbon footprints are: all industrial activities, construction projects, domestic and commercial lighting, use of domestic goods like TV, refrigerator, music system, etc., and even desktop or laptop computers. A very useful technique that attempts to correlate all human activities in terms of energy consumption and equivalent carbon footprint values, the Kyoto Protocol aims to stop the increase in carbon dioxide emissions and bring down the emission level from the present levels to a lower limit for the ultimate safety of mankind and the world we live. The means for control and regulations are: assessing carbon footprints, setting targets, providing alternative projects such as solar energy, wind energy or reforestation, etc. for carbon offsets, making available equipments under CDM and JI systems, and, finally, providing a marketable trading opportunity through the carbon credit system. This system envisages reduction in emissions by countries (having honoured their quota in the most transparent manner) and offers incentive for controlling pollution below the quota level. In other words, if a nation finds it hard to meet the target of reducing greenhouse gases, it can pay another nation to buy carbon credits to balance the overall global emission target; its utilitarian approach lies in this policy of ‘buy’ and ‘balance’ mechanism. The major difference between the Kyoto Protocol and the previous era of pollution control is that, formerly, pollution control was driven only by ‘command-and-control’ regulations— wherein encouragement and regulation were the modes of control, but now the Kyoto Protocol has introduced a marketable economic instrument, thus bringing in industrial commitments to a set emission target. This system does not seek the elimination of industries, but calls for control and offset measures for carbon emission. The system is firmly digging into the global system of greenhouse gas emission control by encouraging reforestation, control and reduction of emission, promotion of alternative fuels, water harvesting, and development of energy

Ethics and the Environment

efficient new technology for emission control, etc. To enable their industries to meet pollution targets, government the world over are offering various additional incentives for pollution control. As a consequence, there is spurt of activities in the development of alternative fuels and energy efficient methods. These drives, in turn, are encouraging designers and manufacturers of pollution control equipment and system to invest in related research and development promotions. All new projects are being examined with a view to ‘green technology’ in order to reduce greenhouse gas emission through reduction as well as carbon conservation. However, transparent mechanisms and close monitoring are required to stop the abuse of the system by ‘manufactured data’. A recent survey in the industrial districts of West Bengal showed that business houses are in fact releasing more pollution in the name of undertaking CDM, and being paid for under the scheme. Perhaps the story is the same all over India, especially in the small and medium size industries, and in transport industries which are traditionally energy inefficient. Nonetheless, carbon credit is now an established national and international carbon trading scheme and a key force in reducing greenhouse gas emission. It attempts to cap the total annual emission of a nation and allows the market to assign monetary values to cover the shortfall through carbon credit trading. The system has generated enough interest amongst companies and individuals to effectively lower greenhouse gas emission. Many investment funds and carbon development companies have now emerged to accumulate credits from individual projects and trade them to others to help offset the shortfall or to finance carbon reduction schemes the world over. Some notable examples of greenhouse gas reduction schemes are destruction of methane from fossils, capturing of carbon dioxide from fossil fuel consumption, maximising usage of solar and wind energy, and emphasising on ‘green technology’ to reduce energy consumption in commercial buildings, etc. Furthermore, this system is also encouraging industries to move away from more polluting fuels to less polluting fuels. For example, there is a trend now to shift from coal (a more polluting fossil fuel) to natural gas fed power plants, which are less polluting and, thereby, needing fewer carbon credit—or saving the same. In fact, the system has now given rise to quite a few active trading programmes in the developed countries e.g. in the EU and the US. In the latter, there is a national market to reduce acid rain and several regional markets to reduce nitrous oxide. Thus, carbon trading is seen to be an effective and better approach than the hitherto practiced tax or regulating systems.There is no debate about the effectiveness of carbon trading system in reducing greenhouse emission, but some critics point to the fact that this system is somewhat complex, needs continuous monitoring and enforcement of quota, and resolution of disputes due to either initial allocation or validity of trading data. There is no doubt that the shift from ‘command and control’ system of controlling pollution to a more fair carbon credit system has yielded some results with better responses from industries and business houses alike.Yet, the journey to hold and gain control over greenhouse gas emission and pollution world over is far from over. A recent Green Report on ‘Carbon Disclosure Projects’29 revealed that in 2008 only 33 per cent companies surveyed in India came out clean on greenhouse gas emissions. This figure, however, nearly doubled (63 per 29, accessed on 16 October 2011

Ethics in Business and Corporate Governance

cent) in the 2009 survey. The situation is even worse in China, the world’s fastest growing industrialised country, with merely 10 per cent of its companies coming out clean in terms of greenhouse gas emission. Viewing from an ethical standpoint, critics point out that industries only act where there is scope of making or saving money, and they are not generally moved by ethical duties and responsibility. While many may challenge this view of industry, in view of their respective commitments to corporate governance and social responsibility, corporate governance with regard to environment conservations has been more an intent than an action (for results). For example: Rivers in India are being polluted by industrial effluents continuously; mining activities are still leaving large scale land degradation, and erosion of farmland by industrial aggravations without creation of commensurate greens is continuing to deplete the environment. As a result, India is clubbed with China to be the major contributors of greenhouse gases in the world due to their rapid industrialisation. During the 2008 Beijing Olympics, China had to consider closing operations of thousands of small and medium industries around the Olympic venues and regulate plying of thousands of vehicles on the streets of Beijing for avoiding smog and pollution in the air30.

Another pointer to the lack of environmental care is slow growth of renewable alternate sources of energy, and continuation of large-scale use of non-renewable petro-fuels or fossil fuels.The concept of carbon credit, a commercial market-based system, is being keenly watched for its ability to bring down emissions and achieve the 2012 target set by the Kyoto Protocol. Despite some loopholes, the measurement of carbon footprints and carbon trading facilities come closer to acceptable ethical standards and means than all other previous methods of pollution control. The utilitarian base and the rational approach to the assessment of carbon footprint and carbon trading systems—for emission control by internalising the costs of emission and pollutions by industries and nations—is certainly more agreeable to the ethical principles. Guided by this principle, the Kyoto Protocol for climate change control binds industrialised and developing nations to bring about global control of greenhouse emission—the most dangerous and challenging environmental and ecological issue facing the present industrialised world. But despite the bindings of Kyoto protocol, are the industries and nations making enough efforts in the right direction? According to a study on the world climate, weather and environment relating to damages caused by environment pollution for the three-year period prior to January 2009, ‘In China, dirty air causes 400,000 deaths per year, while 340 million people do not have access to clean water. In 83 Indian cities whose air quality is monitored, more than 84 per cent breathe poor, bad or dangerous air; only 3 per cent people breathe good air. In Japan emissions were at record levels in 2007 due to closure of a nuclear power plant, necessitating increased generation through thermal power plants. In Dubai, per capita carbon emissions are second only to the USA. The UAE’s per capita energy use is double the world average. Fish stocks there h