This is the last part. It deals with more examples and details and takes the notes forward from the previous parts 1 & 2.

1. 28.12.2016 Note byBala
Corporate Ethics (CE), Corporate Governance (CG) &
Corporate Social Responsibility (CSR) – Hand out 3
Note: To be read in conjunction with PPT slides and other material provided
Background:
In handout 2, we could learn the different provisions under various acts and the relevant statutory
authorities in India. In this handout, let us see some finer points of corporate ethics and how great
organizationsare builtaroundthe globe. Thiswould be intermsof:
1. Ethicsin workplace
2. Ethical decisionmaking
3. Ethical leadership andnewthinkingonthe same
4. Conceptof organizational trustandwhenthisgetseroded &
5. Stepsinbuildinggreatorganizations
6. More aboutCG & CSR including:
I. NarayanaMurthy committee’smandatoryrecommendations
II. Gist of surveyreport,2013 conductedbyTERI & NFCG
Note:This handout has to be read inconjunction withother material givenand the PPT slides.
1. Ethics in work place:
Corporate ethics or the absence of it is demonstrated by actions of corporates at the
management level and or its employees clearly establishing that their actions are executed with
a conscience.The conscience couldbe anyone ormore or all of the following:
a. Social – Actions– Do theybenefit/harmthe society?
b. Moral – What isright andwhat iswrong in generallyacceptedterms?
c. National – Are corporate actionsinconformitywiththe lawsof the land?
d. International – Do the corporates indulge in certain ‘high impact’ actions like money
launderingorillegalarmsandammunitionorsponsoringterrorism?
Further it should be remembered that there are no laws or statutory provisions regarding
‘Business ethics’ by any country. The ethical practices have been codified in the form of
corporate governance for which there are statutory provisions in most of the countries. It all
began with Cadbury Committee recommendations in Great Britain. The USA had also adopted
this and hence this model is known as ‘Anglo-American’ model. Being ethical or unethical has
been exercising the minds of executives of business organizations right from times immemorial
in the history of mankind. The moment ‘commerce’ or ‘business’ was born as is known currently,
greed and hence unethical practices had also begun. History is replete with examples of
cheating, frauds, scams etc. throughout the world with no notable exception of a country or a
region.

2. There are any number of examples of good ethical behaviour in organizations while there are
equally good number if not more examples of bad behaviour too. In fact it is due to the scams of
the 70’s and 80’s of the 20th
century that had given rise to appointment of Cadbury Committee
and its recommendations. This is the beginning of codification of ethical business practices. The
second point is that in unethical practices, it is not only the management which had been
involved. It is also the senior managers who had had a hand in such malpractices. Please refer to
scams of Enron, Satyam Computers and 2008 global crisis about which material has been
separately given. The students are encouraged to search on the web and get to know other
noted global scams including India and learn for themselves rather than the faculty providing
details.
The Essentials:
Everycompanyis differentbuttheyall shouldtake the followingintoconsideration:
 Trustworthiness
 Respect
 Responsibility
 Fairness
 Caring
RelationshipsandEthics:
Ethicsappliestoany relationshipbetweenthe followingindividuals:
 Management/Supervisors
 Colleagues/Employees
 Customers
 Communication is the key among management, employees, and customers in order for
respect to be extended to each person within the organization, and promote
relationshipsthatare basedonhonestyandintegrity
 Be cautious not to cross the line between personal friendships in the workplace and
professionalism
Good Workplace Ethics:(OtherthangiveninHO 1)
 Stayingproductive
 Be accountable foryouractions
 Take initiative
 Thinkcriticallytobe able to solve problems
 Blowingthe whistle
 Be punctual
 Stay positive
 Stay professional
 Take pride inyour work
 Immediatelyattemptingtocorrectan issue
 Setthe example
How to Encourage Good Ethicsinthe Workplace:
 Fair consequences
 Fair treatment
 Recognition
 Communication(be clearandconsistent)

3.  Have office policies
 Transparency
 Trainings
 Have plans of action
 Constructive feedback
Benefitsof goodethicsinthe Workplace:
 Loyalty
 Desirable workenvironment
 Produce results
 Buildgoodreferences
 Good office morale
 Growth andexpansion
 Recognition
Examplesof PoorEthics:(OtherthangiveninHO 1)
 Illegal practices
 Stealing
 Ignoringproceduresandpolicies
 Abusingconfidentialityagreements
 Falsifyinginformation
 Making decisionsforyourownpersonal gain
 Lack of communication
 Withholdinginformation
 Poorcustomerservices
 Gossiping
 Abusingcomputerprivileges
 Ignoringproblems
 Blackmail
 Lying
 Bribes
 Takingon rolesthatare not underyourjobtitle
 Beingunpunctual;poorattendance
Consequencesof PoorEthicsinthe Workplace:
 Stricterrules
 Fewerprivileges
 An undesirable workenvironment
 Stuntsgrowthand productivity
 Causesa domino effectamongothercolleagues
 Potential jobloss
 Potential closingof the organization
As has been detailed in the class during the lectures, it would be good to remember the
difference betweenthe following terms:
1. Profitmakingandprofiteering
2. Good profitsandbad profits
3. Responsibilityandaccountability

4. 2. Ethical decision making: (Other than Ethical dilemmas as given in HO 1)
“Charity begins at home”. Hence the spirit of ethics and ethical behaviour should start from the
top management. Top management and senior management through their actions should
demonstrate fully and consistently ethical behaviour. Then the chances are bright that the entire
organization is imbued with the spirit of ethical behaviour. The top and senior management
should be complete in ‘walking the talk’. Let us see some principles and steps involved in ethical
decisionmakinginanorganization.
a. Prepare a check list of likely unethical practices overall, across all functions. This should be
sharedwithall employeeswithdistinctpenaltiesfornon-compliance.
b. Prepare a check list of likely unethical practices, department, division, function-wise
covering all the functions of the organization. This should be shared with the respective
employeeswithdistinctpenaltiesfornon-compliance
c. Evolve ‘Standard Operating Procedures’ (SOP’s) for all routine decisions across all functions
and make a manual of the same. This has to be mandatorily followed by all the departments,
divisions,offices, branches,plantsetc.
d. Evolve a ‘process flow chart’ for all non-routine decisions and complex problems and make a
manual of the same. Such decisions and problems in which the junior level do not have
authority could still facilitate the senior managers with a supportive role; in turn the senior
level managers could facilitate the decision making of top level management executing a
supportingrole.
e. Evolve a detailed procedure for ‘exceptions handling’ in non-standard situations and
problems. Again make a manual of the same. This is to ensure that no time is wasted in
dealing with such situations and prompt reference is made wherever necessary to the
relevanthigherauthoritiesforimmediate action.
f. SOPs, process flow charts and exception handling procedure are like ‘bible’ to the ethical
functioning of the organization and exception should really be an exception worthy of
special consideration of deviation with very clear understanding across the organization. The
understandingis that this shouldnot be quotedas a precedentin future.
In fact, the top management and senior management have a crucial role in this. They should
respect the organizational processes and procedures; in a number of cases, it is the
knowledge of the author of this handout that it is usually the top management which
initiates deviation from the standard processes and procedures as per their whims and
fancies, showing scant regard to the ‘laid down’ and ‘accepted’ practices. In the long run,
thus the SOPs and process flow get diluted by the employees down the line who derive
courage from the knowledge and experience that top management itself is not serious in
these matters. The ethical fabric of the organization gets mutilated with practically no
scope for revival.
g. The ethical leader always aims for fairness and would not seek ‘self glorification’ while
conducting business or taking decisions or solving problems. He or she would not satisfy the
hungerforpersonal powerorauthorityor acclaimwhile beingethical inhis/her decisions.
h. Strongconvictioninthe democraticprocessandfull commitmenttothe same.
i. Being humane in approach with mastery over fundamentals of human psychology. Empathy
and Johari windowconceptsshouldbe appliedinall inter-personal situations.

5. j. Evolving an effective ‘Knowledge management system’ based on past experience that gets
recorded for being used in future. This is with the full knowledge that past experience may
not be fully applicable to the current situation although it is a similar one. The reasons are
not far to seek – theycan be summarizedasunder:
i. Differenttimes
ii. Differentenvironment
iii. Organizationwouldhave grown
iv. Employeesinvolvedwouldhave grownupinthe organization
v. The expectations of the employees involved would be different now, even if they
wouldhave beeninvolved insimilarsituation/s inthe past
k. All facts relating to a situation or a problem should be collected. The data should be
converted into information and complete analysis should be done objectively before
choosingthe alternative options.
l. If required where solution is evasive, consultations with specialists are to be done. Further
meetings are to be conducted after holding ‘brain storming’ sessions if called for. Please
understandthe differencebetween‘brainstormingandmeeting’.
m. Consider cause and effect in the deepest sense. Also evaluate the alternative options from a
long-term perspective in the organizational context. This is to ensure that decisions are not
arbitrary but robust and maintainable in the foreseeable future. While open mindedness to
feedback and mindset for accepting the same and implementing are virtues, frequent
modification of a management decision is not wholesome; it send wrong signals across the
organization.
n. Guard against arrogance at the senior management or top managementlevel. Delusion does
happen in case the top management has been operating for a long time in a protected
environment. Power and authority could make persons heady over a period of time and this
is what top management and senior management personnel should guard against while
makingdecisions,especiallythe ‘pathbreaking’ones.
o. Businessdecisionsshouldnotbe basedonthe following:
i. Personal opinions
ii. Prejudices
iii. Personsinvolvedorwhowill be impactedbythe decisions
iv. Personal valuesasdistinctfromorganizational values
v. Personal beliefs
vi. Religiousfaith
ETC.
p. It wouldpaywell tokeepinmindthe following:
 Do not try to influence
 Do not oversell anysolution
 Diffuse situations
 Determine commongroundforone andall
 Whenever your immediate team is totally taken in by any decision arrived at by all of
you, be on guard; defer taking the decision and communicating the same to those who
wouldbe impactedbythe decision
 Most of the times, the best ethical decisions are made by the persons who would be
impacted by such decisions and not by those who sit in ivory towers, far removed from

6. the ground realities. Ethical decisions are definitely not made by leaders who do not
trust theirpeople.
3. Ethical leadership: (Other than detailed in HO 1)
Unlike in HO 1, this section will focus on ‘organizational trust’ and not traits of an ethical leader
etc.
Very simply articulated, the development of leadership ability and the capacity to recognize
leadership in practice involves moving through the following 6 stages of recognition for the
individual:
I. I know who I am and what I can do; I understand my role in the relationships I choose to
perpetuate; I understand how my own motives and desires compare to my actual
abilities, and I am aware of the emotional as well as the cognitive dimensions of the
relationshipsIchoose toperpetuate
II. I understand that there are realities in my life and in my relationships that I do not
control (i.e., the nature of the national economy, the behavior of other people), and I
realize that the relationships in which I function may make demands I cannot satisfy –
neithercanmy demandsalwaysbe satisfiedbythem
III. I understand that real tensions emerge between myself and others based on both
emotional andcognitivefactors
IV. I understand that there is a gap between my intuitive sense of what those tensions may
mean and a potentially objective definition which takes into account factors that I may
not knowor be able to recognize;
V. I further understand that in order to remain dynamic, relationships and groups depend
on someone being able to find a way to transcend the tensions and ambiguities than
threatendynamism
VI. I recognize the capacity to transcend the tensions and ambiguities that threaten the
dynamism of human interaction to be leadership, and even if I am unable to practice it, I
am capable of recognizing leadership practice as the capacity to move individuals
beyond the limits of their own emotions and cognitive abilities when those limits
threatenthe developmentof the individualorthe dynamismof the teamor group.
“Trust men and they will be true to you; treat them greatly, and they will show themselves
great.” Ralph Waldo Emerson wrote this about the courage it takes to develop business
relationships in his 1944 essay, Prudence. He emphasized that such relationships can
develop only after one has carefully assessed the “present times, persons, property, and
existingforms”of organizations.
There are fourdifferenttypesof trust ingeneral - Basic,simple,blindandauthentic.
The differentcharacteristicsof these fourtypesof trustare capturedin the followingmatrix:
Basic Simple Blind Authentic
Without thought or
reflection
Remains unthinking
or reflective
Exposed to violation
and betrayal but not
opento possibility
Reflective and
honest
Openended Is uncritical and
unquestioning
Willfully self-
deceptive
Open to possibilities
of betrayal and can
cope withsituations
Indiscriminate Does not even
conceive possibility
Refuses to consider
evidence of distrust
Focused on
relationships rather

7. of distrust than single
transactions and
outcomes
May be inherited as
innate
Basedon familiarity Developed through
beliefs about other
people
Not naive or self
destructive
Enhanced or
undermined by
experience with
others
Takes security for
granted
Maintained with
effort
Self confident
Basis for one’s
personality and
demeanour
Developed through
beliefs about other
people
Strong, intensive and
emotional
Self scrutinizes
Largely negative,
believes bad things
will happen
Reaction to betrayal
isdenial
Betrayal is
devastating
Demands reasons
for trust
Relies on one’s own
security
Cannot be recovered
once lost
Results in
defensiveness and
narrowness
Chosen and
maintained with
effort
Conditional Conditional Unconditional Develops through
relationswithothers
Involveschoices
Matter of
commitment and
integrity
Cannot be taken for
granted
Conditional
 Basic trust is the ability and willingness to meet people without inordinate suspicion, the ability
to talk comfortably to and deal with strangers, and the willingness to enter into intimate
relationships. Basic trust provides the basis for one’s entire personality and demeanor toward
the world.
 Simple trust is the utter absence of suspicion: it demands no reflection, no conscious choice, no
scrutiny, and no justification. It may come about because no reason has ever arisen to question
the other’strustworthiness,butitmayalsobe that the one whotrustsis simplynaïve.
 Blind trust has been exposed to violation and betrayal but refuses to believe it has occurred.
Blindtrustdeniesthe possibilitythatanythingcouldshake orbetraythe trust.
 Authentic trust is fully self-aware, cognizant of its own conditions and limitations, open to new
and even unimagined possibilities, based on choice and responsibility rather than the
mechanical operations of predictability, reliance, and rigid rule following. Authentic trust is well
aware of the risks and willing to confront distrust and overcome it. Authentic trust leads to
productive organizational relationships. An authentic trusting relationship doesn’t simply
happen, nor can it be mandated or forced. Authentic relationships evolve over time, starting
with small acts and progressing to full strength based on individual experiences. Building such a
relationship in the workplace is a reciprocal process with both the employee and the employer
voluntarily assuming responsibility for its initiation, development, and maintenance through high
levelsof affectionandrespect

8. 4. Barriers to Building a Culture of Organizational Trust
We have seen in HO 1 three pillars of an ethical organization, namely, ‘Ethical employees’, ‘Ethical
leadership’ and ‘Organization’s structure and systems’. Ethical and unethical practices in
organizations have been given both in HO 1 & in this handout. Ethical leadership has been given in
detail in this handout. Through ethical leadership, organizational trust is built and that is what we
will see in this section. In the subsequent section, we will see the steps to build an effective
organization,otherthanorganization’sstructuresandsystemsdetailedinHO1.
An organization’s employees, policies, and practices may contribute to the perceptions of
disappointment and breaches of trust. In The Trusted Leader, Galford and Seibold Drapeau list
several factorsthathinderorganizational culturesof trust. Thesefactorsinclude:
 Employees with personal agendas and needs for promotion, power, and recognition that do not
alignwiththe organization’sstrategies.
 Employeeswithvolatile personalitiesthatreflectaneedforvengeance.
 Employeeswhointentionallyclutter communicationchannels.
 Employees who are incompetent or perceive their co-workers or management to be
incompetent.
 An organizational environment with a history of underperformance, complex situations,
numerousreorganizations,ormanagementchanges.
 Organizations with inflexible or inconsistent organizational policies and standards. Strong
leadershipcanhelporganizationsovercome thesebarrierstoorganizational trust.
“A leader who can inspire trust is invaluable for bringing together individuals and holding them
togetheruntil trustcan form.”—JohnGardner
5. Assessing Organizational Trust
It is also important that leadership assess the current level of trust within the organization beginning
with leadership. Kouzes and Posner identified four questions to measure one’s trustworthiness as a
leader:
1. Is my behaviorpredictable orerratic?
2. Do I communicate clearlyorcarelessly?
3. Do I treatpromisesseriouslyorlightly?
4. Am I forthrightordishonest?
Measure employees’ trust in the organization by using the five statements created by Gabarro and
Athos:
1. I believe myemployerhashighintegrity.
2. I can expectmyemployertotreatme ina consistentandpredictable fashion.
3. In general,Ibelievemyemployer’smotivesandintentionsare good.
4. I thinkmy employertreatsme fairly.
5. Managers from myorganizationare openandupfrontwithme.
6. Leading a Culture of Organizational Trust
A high trust culture is essential for adapting to continuous change and continuous improvement. To
develop and maintain a culture of authentic trust, leaders may find the following ten suggestions
helpful:

9.  Practice humane leadership. Ensure employees know you are aware of, sensitive to, and
understanding of their individual feelings, thoughts, and experiences. Assure them promises will
be kept,confidencesmaintained,andsensitive informationhandledjudiciously.
 Be a paragon of trustworthiness. Be honest by saying what will be done, act with integrity by
doingwhatwas saidwill be done,andbe credible byfollowingthroughwithcommitments.
 Be willing to acknowledge, accept responsibility for, and repair perceived breaches or betrayals
of trustwithemployees.
 Develop, communicate, and apply organizational vision, mission, and values statements to
ensure compatible beliefs and a shared focus on the work at hand. Incorporate trust objectives
intothe organizational strategicplan.
 Determine if organizational policies, procedures, and rules are applied consistently and
equitably, and send the message that employees can be trusted. For example, Dr. W. Edwards
Deming suggested that organizational forms requiring hierarchies of signatures are a signal of
distrust.
 Unclog organizational communication channels by implementing open-door and open-book
policies and establishing user-friendly networks. Share the results of organizational assessments
of workwithemployeestobuildaculture of openness.
 Demonstrate faith in employees by reducing supervision and monitoring of employees while
they are working and by implementing organizational structures that encourage delegation of
authority,responsibility,andteamwork.
 Sponsor employee workshops on organizational trust. Workshops can help employees
understand the different types of trust, learn how to build authentic trusting relationships,
identifyperceptionsof brokentrust,andlearnhow totake corrective actions.
 Develop an organizational “collective identity” by having employees work together in the same
or co-locatedbuildings.
 When problems are investigated, attempt to determine what went wrong and why rather than
whowas responsible.
7. When is organizational trust eroded?
1. When people don’t feel a sense of belonging – Promote a sense of identity at all levels so that
they have a pride of belongingand job satisfaction
2. When people don’t respect each other – Mutual trust and respect is a must for organization to
be effective andgrowing
3. Whenpeople don’tfeelsafe –Use discipliningasa constructive tool and not destructive
4. When employees are not recognized for doing a good job – Evolve a just rewards system and
the recognition should be immediate and timely. The timing is far more critical in recognition
rather than the value or size of the reward
5. When people are inconsistent in honouring their commitments – Response to suggestions
shouldbe immediate.Deliverasper commitmentand promise
6. When people are not fully informed – Communication is the life line of any organization. The
top managementshould employ5 W’s and 1 H
7. When people promote turf protection (selective protection especially practiced by top
management) – Top and senior management should realize that it is not enough being fair but
it is requiredto be seento be fair by all the employees
8. Lack of competency in senior managers and supervisors – ‘Walk the talk’ – What the top and
senior management expect from their juniors, they should exhibit in ample measure – plans
for growth, sustainable growth strategy, beingready for global changesin the sector etc.
9. When employees are micromanaged – Once the tasks are delegated and lines of
responsibilities and functions are clear, top and senior management should not be control

10. freaks; through effective monitoring system by reports, control should be exercised and not by
micromanagement.
10. Whenemployeesthinkthattheyare beingtreatedunfairly –Same as for point no. 7
Note: Once the leaders of the organization strive and succeed in building trust into the
rank and file of the organization, values are easily built in. Ethical practices automatically
result. There need be no special efforts for this.
8. How to build great organizations through ethical leadership, ethical
employees, ethical practices and trust
12 greatthingsfor buildingagreatorganization
Value Staff Opinions
At a recent conference in Denver, Inc. and an organization called Winning Workplaces brought
together leaders from a range of businesses to talk about building and maintaining great company
cultures. What's the value if you have a great culture? "If your staff believes that they matter, that
their opinions matter, the company soars,"• says Tom Walter CEO of Tasty Catering in Chicago.
"People are not just productivity units. I believe in democracy because the future is as secure as
people are withworkingtogether."•
Listentothe Pronouns
"If an employee comes to you with a problem, ask those questions first before offering a solution,"•
says Bob Rosner, author of The Boss's Survival Guide. "Listen to the pronouns; if your employees use
they/them and not we/us, you have problems." If your culture seems to be weak, Rosner suggests
you start small. For example, before every meeting, give employees wadded up paper to throw at
youwhenyousay somethingwrong.
Hire Wisely
Norm Brodsky, a longtime Inc. columnist and founder of CitiStorage in New York City, says that
culture starts with hiring. "It takes almost a year to find out what people who work for you are like,"
he explains. "We give every new hire 90 days probation. I hire for attitude not for aptitude; we can
train for the skills we need them to have. Education is the key to sustainability of your culture while
youare growing."•
Create a Dream Map
"You know where you are going but you have to communicate, share where you are going,"• says
Jill Blashack Strahan founder and CEO of Tastefully Simple in Alexandria, Minnesota. "When people
have hope for the future they will have power in the present."• To share your vision, Strahan
suggestsyoulayout yourgoalson a "dream map"that youpost inpublicareas.

11. Create BondingRituals
"Everyone in the service industry has to come up with a test toform camaraderie around," says Larry
O'Toole founder and CEO of Gentle Giant in Boston. So to that end, he asks all new recruits to run
the stairs at Harvard stadium. "It's not how fast you run in the stadium, it's that you do your best,"
saysO'Toole."We're lookingforpeople whowanttogive 100 percent."
Focuson Consensus
"Ask yourself as CEO, "˜If I make this decision without employees, could this hurt the culture more
than it helps?'" says Traci Fenton, founder and CEO of WorldBlu in Austin. "You have to decide what
decision-making method is going to work best for your company. I love working by consensus
because Idon't have all the answers."•
ForgetAboutWeaknesses
"We hire people for their strengths and then manage them to fix their weaknesses," observes
Marcus Buckingham, author of First, Break All the Rules. "Weaknesses are weaknesses, not
opportunities for growth. Strengths are the activities that strengthen you. Weaknesses are the
activities that weaken you. Managers don't build on strengths because it asks us managers to be a
lotmore creative.Whatpercentage of yourtypical daydoyou spendplayingtoyourstrengths?"•
Ask,Don't Guess
"Be vulnerable with your staff," says Paul Spiegelman, founder of Beryl, a call-center business in
Dallas. "Tell them you want to change things, then ask, "˜How do we do this together?' We can't
guess what's important to employees. We have to give them ways to communicate with us. And we
have to get out of our comfort zone as leaders. The more personal you can be in any situation, while
beingprofessional,that'sthe wayto do it."•
Nurture YoungLeaders
Younger workers and their managers often fail to understand one another when it comes to setting
goals, says Dan Lissner, general counsel of Free Flow Power Corporation in Gloucester,
Massachusetts. "I see a challenge of communication," he says. "Interviewing a younger candidate,
I'm interested in understanding their expectations before I explain what we do. If you can't hold
their interest, there's not a lot that can bring them back. Being more explicit in our expectations is
whathas to happen."
Share Responsibility
"We put a tremendous amount of responsibility on those we hire, and make sure that that's what
they're craving,"• says Darren Paul co-founder of New York City-based Night Agency. "We try to talk
people out of working for us. When they say yes this is what I want, those are the ones who
shine."•

12. Create an Innovative Office
"We have a unique way of working in one big open room,"• says Rich Sheridan, president of Menlo
Innovations in Ann Arbor, Michigan. "No one has their own personal chair, table, or computer. On
the first day, someone will push the keyboard over and say, Let's get going. It helps to create an
upwardspiral of motivation."•
Look to the Future
"Most companies fail because of self-inflicted wounds, not external circumstances," says Steve
Kimball, CEO of Inc. Navigator. "You should be fundamentally challenging your business model."
Kimball advises CEOs to identify a business's top three "must-do priorities" in 2011 and then make
sure the management team is focused on these goals. Without a clear set of shared priorities, he
believe,astrongcompanyculture will nottake root.
9. More about Corporate Governance & Corporate Social Responsibility
The very first step towards regulating corporate practices in India outside the provisions of The
Companies Act, 1956 is the establishment of Securities Exchange Board of India (SEBI) in 1992. As
most of us would be aware, SEBI replaced the earlier Capital Controller of India (CCI). To recap the
evolutionof corporate governanceglobally,letusrevisitwhatwe have seeninHO1.
1. The Cadbury Committee, 1992 recognizes Corporate Governance as the system by which
companies are directed and controlled. This has subsequently become the Anglo-American
model.
2. According to the OECD (Organization for Economic Co-operation & Development), Principles of
Corporate Governance, first in 1998 & 2004, "Corporate governance involves a set of
relationships between a company’s management, its board, its shareholders and other
stakeholders. Corporate governance also provides the structure through which the objectives of
the company are set, and the means of attaining those objectives and monitoring performance
are determined."
3. The Cadbury Report (UK, 1992) and the Principles of Corporate Governance (OECD, 1998 and
2004) present general principles around which businesses are expected to operate to assure
propergovernance
4. The ‘Desirable Corporate Governance – A Code’ was developed by the ‘Confederation of Indian
Industries (CII)’ in 1998 based on the then existing three global models for CG. To recap what we
have seeninHO 1, there are three differentmodelsforCGglobally:
a. The Anglo-Americanmodel
b. The German model &
c. The Japanese model
5. This was followed by the first full-fledged CG recommendations for India by the Kumar
Mangalam Committee report. This was immediately adopted by SEBI and the result was
inclusionof Clause 49in the listingagreementwithStockExchangesforall listedcompanies.
6. The Narayana Murthy committee report further amended the requirement of CG by limited
companies in India (2003). The recommendations were also incorporated by SEBI and clause 49
was duly amended. The current clause 49 of the listing agreement includes both KMB committee

13. and Narayana Murthy committee recommendations. The revised clause came into effect from
2006 aimed at enhancing the responsibilities of the boards of directors and the management in
all limitedcompaniestowardscorporate governance.
7. Detailsof NarayanaMurthy committee termsof reference andrecommendations:
Terms of Reference
 To review the performance of corporate governance; and
 To determine the role of companies in responding to rumour and other price sensitive
information circulating in the market, in order to enhance the transparency and integrity of the
market.
Mandatory recommendations
 Auditcommitteesof publiclylistedcompaniesshouldbe requiredtoreview the following
informationmandatorily:
 Financial statementsanddraftaudit report,includingquarterly/half-yearlyfinancial
information;
 Managementdiscussionandanalysisof financial conditionandresultsof operations;
 Reportsrelatingtocompliance withlawsandtoriskmanagement;
 Managementletters/lettersof internal control weaknessesissuedbystatutory/internal
auditors;and
 Recordsof relatedpartytransactions
 All audit committee members should be “financially literate” and at least one member
shouldhave accountingorrelatedfinancial managementexpertise.
Explanation1– The term “financiallyliterate”meansthe abilitytoreadandunderstand
basicfinancial statementsi.e.balance sheet,profitandlossaccount,andstatementof cash
flows.
Explanation 2 – A member will be considered to have accounting or related financial
management expertise if he or she possesses experience in finance or accounting, or
requisite professional certification in accounting, or any other comparable experience or
background which results in the individual’s financial sophistication, including being or
having been a chief executive officer, chief financial officer, or other senior officer with
financial oversightresponsibilities
 In case a company has followed a treatment different from that prescribed in an accounting
standard, management should justify why they believe such alternative treatment is more
representative of the underlying business transaction. Management should also clearly
explainthe alternativeaccountingtreatmentinthe footnotestothe financialstatements.
 A statement of all transactions with related parties including their bases should be placed
before the independent audit committee for formal approval / ratification. If any transaction
is not on an arm’s length basis, management should provide an explanation to the audit
committee justifyingthe same.
 The term “related party” shall have the same meaning as contained in Accounting Standard
18, Related PartyTransactions,issuedbythe Institute of CharteredAccountantsof India.
 Proceduresshouldbe inplace toinformBoardmembersaboutthe riskassessmentand
minimizationprocedures.Theseproceduresshouldbe periodicallyreviewedtoensure
that executivemanagementcontrolsriskthroughmeansof aproperlydefinedframework.
Managementshouldplace areportbefore the entire Boardof Directorseveryquarter
documentingthe businessrisksfacedbythe company,measurestoaddressandminimize

14. such risks,andany limitationstothe risktakingcapacityof the corporation.Thisdocument
shouldbe formallyapprovedbythe Board.
 Companies raising money through an Initial Public Offering (“IPO”) should disclose to the
Audit Committee, the uses / applications of funds by major category (capital expenditure,
sales and marketing, working capital, etc), on a quarterly basis. On an annual basis, the
company shall prepare a statement of funds utilised for purposes other than those stated in
the offer document/prospectus. This statement should be certified by the independent
auditors of the company. The audit committee should make appropriate recommendations
to the Board to take up stepsinthismatter.
 It should be obligatory for the Board of a company to lay down the code of conduct for all
Board members and senior management of a company. This code of conduct shall be posted
on the website of the company. All Board members and senior management personnel shall
affirm compliance with the code on an annual basis. The annual report of the company shall
containa declarationtothiseffectsignedoff bythe CEOand COO.
Explanation –For thispurpose,the term“seniormanagement”shall meanpersonnelof the
companywhoare membersof itsmanagement/operatingcouncil (i.e.core management
teamexcludingBoardof Directors).Normally,thiswouldcomprise all membersof
managementone level belowthe executive directors.
 There shall be no nominee directors. Where an institution wishes to appoint a director on
the Board, such appointment should be made by the shareholders. An institutional director,
so appointed, shall have the same responsibilities and shall be subject to the same liabilities
as any other director. Nominee of the Government on public sector companies shall be
similarly elected and shall be subject to the same responsibilities and liabilities as other
directors.
 All compensation paid to non-executive directors may be fixed by the Board of Directors and
should be approved by shareholders in general meeting. Limits should be set for the
maximum number of stock options that can be granted to non-executive directors in any
financial year and in aggregate. The stock options granted to the nonexecutive directors
shall vest after a period of at least one year from the date such nonexecutive directors have
retiredfromthe Board of the Company.
Companiesshouldpublishtheircompensationphilosophyandstatementof entitled
compensationinrespectof non-executive directorsintheirannual report. Alternatively,this
may be put upon the company’swebsite andreference drawn theretointhe annual report.
Companiesshoulddiscloseonanannual basis,detailsof sharesheldbynon-executive
directors,includingonan“if-converted”basis.
Non-executive directorsshouldbe requiredtodisclose theirstockholding(bothownor held
by / forotherpersonson a beneficial basis)inthe listedcompanyinwhichthey are
proposedtobe appointedasdirectors,priortotheirappointment.These details should
accompanytheirnotice of appointment.
 The term “independentdirector”isdefinedasanon-executivedirectorof the company
who:
o Apart fromreceivingdirectorremuneration,doesnothave anymaterial pecuniary
relationshipsortransactionswiththe company,itspromoters,itssenior
managementoritsholdingcompany,itssubsidiariesandassociatedcompanies;
o Is notrelatedtopromotersor managementatthe board level orat one level below
the board;

15. o Has not beenanexecutive of the companyinthe immediatelyprecedingthree
financial years;
o Is nota partneror an executive of the statutoryauditfirmorthe internal auditfirm
that isassociatedwiththe company,andhas notbeena partneror an executive of
any suchfirmfor the last three years.Thiswill alsoapplytolegal firm(s) and
consultingfirm(s)thathave a material associationwiththe entity.
o Is nota supplier,service providerorcustomerof the company.This shouldinclude
o lessor-lessee typerelationshipsalso;and
o Is nota substantial shareholderof the company,i.e.owningtwopercentormore of
the blockof votingshares.
The considerationsas regards remunerationpaid to an independentdirectorshall be
the same as those appliedto a non-executive director.
 Whistle blowerpolicy:
o Personnel whoobserve anunethical orimproperpractice (notnecessarilyaviolation
of law) shouldbe able toapproach the auditcommittee withoutnecessarily
informingtheirsupervisors.
o Companiesshall take measurestoensure thatthisrightof access iscommunicated
to all employeesthroughmeansof internalcirculars,etc.The employmentand
otherpersonnel policiesof the companyshall containprovisionsprotecting“whistle
blowers”fromunfairterminationandotherunfairprejudicial employmentpractices.
o Companiesshall annuallyaffirmthattheyhave notdeniedanypersonnel accessto
the auditcommittee of the company(inrespectof mattersinvolvingalleged
misconduct) andthattheyhave providedprotectionto“whistleblowers”from
unfairterminationandotherunfairorprejudicialemploymentpractices.
The appointment,removal andtermsof remunerationof the chief internal auditor
mustbe subjecttoreview bythe AuditCommittee. Suchaffirmationshallforma
part of the Board reporton Corporate Governance thatis requiredtobe prepared
and submittedtogetherwiththe annual report.
 The provisions relating to the composition of the Board of Directors of the holding company
should be made applicable to the composition of the Board of Directors of subsidiary
companies.
At leastone independentdirectoronthe Boardof Directorsof the parentcompany shall be
a directoron the Board of Directorsof the subsidiarycompany.
The AuditCommittee of the parentcompanyshall alsoreview the financial statements, in
particularthe investmentsmade bythe subsidiarycompany.
The minutesof the Board meetingsof the subsidiarycompanyshall be placedfor review at
the Board meetingof the parentcompany.
The Board report of the parentcompany shouldstate thattheyhave reviewedthe affairsof
the subsidiarycompanyalso.
 SEBI shouldmake rulesforthe following:
o Disclosure in the report issued by a security analyst whether the company that is
being written about is a client of the analyst’s employer or an associate of the
analyst’s employer, and the nature of services rendered to such company, if any;
and
o Disclosure in the report issued by a security analyst whether the analyst or the
analyst’s employer or an associate of the analyst’s employer hold or held (in the 12
months immediately preceding the date of the report) or intend to hold any debt or
equity instrument in the issuer company that is the subject matter of the report of
the analyst.
 Management should provide a clear description in plain English of each material contingent
liability and its risks, which should be accompanied by the auditor’s clearly worded

16. comments on the management’s view. This section should be highlighted in the significant
accounting policies and notes on accounts, as well as, in the auditor’s report, where
necessary.
This is important because investors and shareholders should obtain a clear view of a
company’s contingent liabilities as these may be significant risk factors that could adversely
affectthe company’sfuture financial conditionandresultsof operations.
 For all listedcompanies,there shouldbe acertificationbythe CEO(eitherthe Executive
Chairman or the Managing Director) and the CFO (whole-time Finance Director or other
person discharging this function) which should state that, to the best of their knowledge and
belief:
o They have reviewed the balance sheet and profit and loss account and all its
schedules and notes on accounts, as well as the cash flow statements and the
Directors’Report;
o These statements do not contain any material untrue statement or omit any
material factnor do theycontainstatementsthatmightbe misleading;
o These statements together present a true and fair view of the company, and are in
compliance with the existing accounting standards and / or applicable laws /
regulations;
o They are responsible for establishing and maintaining internal controls and have
evaluated the effectiveness of internal control systems of the company; and they
have also disclosed to the auditors and the Audit Committee, deficiencies in the
design or operation of internal controls, if any, and what they have done or propose
to do to rectifythese;
o They have also disclosed to the auditors as well as the Audit Committee, instances of
significant fraud, if any, that involves management or employees having a significant
role inthe company’sinternal control systems;and
o They have indicated to the auditors, the Audit Committee and in the notes on
accounts, whether or not there were significant changes in internal control and / or
of accountingpoliciesduringthe year.
 Legal provisions must specifically exempt non-executive and independent directors from
criminal and civil liabilities under certain circumstances. SEBI should recommend that such
exemptions need to be specifically spelt out for the relevant laws by the relevant
departmentsof the Governmentandindependentregulators,asthe case may be.
However, independent directors should periodically review legal compliance reports
prepared by the company as well as steps taken by the company to cure any taint. In the
event of any proceedings against an independent director in connection with the affairs of
the company, defence should not be permitted on the ground that the independent director
was unaware of thisresponsibility.
8. ‘Corporate Governance’ encompasses commitment to values and to ethical business conduct to
maximize shareholder values on a sustainable basis, while ensuring fairness to all stakeholders
including customers, employees, investors, vendors, Government and society at large. (Note on
‘Corporate Governance and Ethics - Challenges and Imperatives’, Ranjana Kumar, Central
Vigilance Commission,GOI;2007).
9. The Sarbanes-Oxley Act (US, 2002) is an attempt by the federal government in the United States
to legislate severalof the principlesrecommendedinthe CadburyandOECDreports.
10. November 2010 witnessed the launch of Voluntary International Standard - ISO 26000:2010,
Guidance for social responsibility - developed in response to a growing recognition that
corporatesneedtobe sociallyresponsible.

17. 11. However, corporate governance reforms in India have focused primarily on the company Board,
senior-level management and functions and responsibilities of the audit committee. Very limited
studies have been undertaken on understanding the state of corporate governance in India.
Research undertaken by scholars also has concentrated primarily on the roles and
responsibilities of the board, company directors, and the top-level management for the
protection of investors and shareholders’ rights. The other stake holders of business
organizations have been ignored by and large. Hence there was an urgent need to address the
concerns of all stake holders. This has given rise to the current Corporate Social Responsibility
in India. This initiative is by GOI is to promote inclusiveness in corporate ethical practices and
to make the framework comprehensive. The first CSR Voluntary guidelines were formulated
and adopted in 2009. These guidelines were refined in 2011 by The Ministry of Corporate Affairs
(MoCA) through “National Voluntary Guidelines on the Social, Environmental and Economic
Responsibilities of Business. The recommendations were given by IICA – Indian Institute of
Corporate Affairs.
12. The Department of Public Enterprise, in May 2010, published its CSR Guideline for Central Public
Sector Enterprises (CPSEs), making it mandatory for the profit-making PSUs to create a CSR
budgetbyallocating0.5% to 5% of the netprofitof the previousyear.
13. The final shape to CSR has since been given and the mandatory requirement for limited
companies has been given in HO 1. The norms relate to average PAT for three years and the
companiesattractingthe normsintermsof turnoveretc.have alsobeendetailedthere.
14. One of the key features of good corporate governance practices or ethical business conduct is
the disclosure of financial as well as non-financial information with respect to the company’s
performance at the right time andin a language and manner which is understood by the investor
community as well as other stakeholders at large, in order to enable informed decisions. Hence
the current CSRreport isbeingmade inthe form of ‘SustainabilityReporting’(SR).
15. Through its board resolution, passed on 24th November 2011, SEBI has mandated listed
companies to report on Environmental, Social and Governance (ESG) initiatives undertaken by
them through a Business Responsibility (BR) report which would form part of a company’s
annual reports/filings. As per SEBI’s directive, the business responsibility reports should describe
measures taken by companies covering the key principles of the 'National Voluntary Guidelines
on Social, Environmental and Economic Responsibilities of Business’ framed by the Ministry of
Corporate Affairs (MCA). This SEBI directive will be immediately applicable to the top 100
companies (by market capitalization) and remaining companies will come under its ambit in a
phasedmanner.
16. The Indian corporate sector is replete withexamples of firms that profess strong ethical cultures
on paper but become unraveled by corrupt behavior. Having a strong sense of ethics is not a
guarantee that a company will always do the right thing. But the opposite is also true: many
companies have started from poor reputations and set new benchmarks of corporate ethics. The
key component underlying much of what the best ethical companies do is leadership.
Leadership — made visible through actions, commitment, and examples — sets the moral
tone that emanates from the top of a company and that translates ethical principles into the
concrete behavior expectedfromall personsacting on behalfof a company.
17. Two organizations came together for undertaking a survey of Indian limited companies to
determine the extent of implementation of CG and CSR provisions in spirit rather than only on
paper. These are TERI and NFCG. These are respectively ‘The Energy & Resources Institute’ and

18. ‘National Foundation for Corporate Governance’. This was undertaken in 2013 and the detailed
report has been made available separately to the students along with handout. As usual there is
a substantial gap between what they wanted to achieve and what they ended up achieving in
terms of target companies. The survey could be completed only for 35 listed companies. In a
manner of speaking, it is not representative of more than 3500 actively traded companies on
stock exchanges. This cannot be helped in the Indian context, perhaps. What is inferred here is
that even listed companies do not forth come to participate and share information with
national bodieswhenthey undertake a research project of survey.
18. The gist of the survey findingsinthe formof executivesummaryisgivenbelow:
a. The study incorporates inputs from 35 companies representing varied sectors from
across the country, namely – Cement, Information Technology, Agricultural Services,
Automobile, Metals and Mining, Energy, Oil & Gas, Information Technology,
Chemicals and Fertilizers, Consumer Goods & Services, Agricultural Services,
Finance,ConsultingServices,andInfrastructure
b. Key drivers affecting creation and adoption of a code of conduct: Company
reputation and brand image affecting the business bottom line, stakeholder
expectations,andgovernmentregulations.
c. Guidelinesandstandardsaffectingthe formulationof code of conduct:
i. All the companies believed that a code of conduct reflected their values and
commitment to the stakeholders and society at large. MNCs operating in
India are guided by their parent companies while conforming to the laws of
the landwhere theyare operating.
d. Involvement of stakeholders in formulation of code of conduct: MNCs operating in
India were more comprehensive in involving all stakeholders in this while Indian
companiesare involvingmore the boardsof directors,CEOs,governingcouncilsetc.
e. The codes mainly applied to employees, senior executives and boards of directors. A
fewMNCshave started involvingtheirsupplierstoo.
f. Awareness generation on code of conduct: By and large all the companies, Indian
and MNCs are adequate intheireffortsthroughtrainingetc.
g. Effective implementation of code of conduct: By and large all the companies have
appointedabodyfor thisfunction.
h. Mechanisms for handling code of conduct grievances and compliance issues: By and
large the companies have well established policies and procedures for this.
Mechanisms, such as the Ombudsperson procedure, whistle-blowing policy, annual
employee opinion survey, and so on are in place for employees to report any
grievancesandcasesof breach of Code of Conduct.
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