ETHICS IN GOOD CORPORATE GOVERNANCE

[Dr. Sanjiv Agarwal]

One may govern life in accordance with the revealed truth as one sees it or natural law or a simple precept of not treating others as ends, or in pursuit of the good life of contemplation prized by Aristole. One may believe that morality lies in doing the best one can for oneself and one's children and giving something back to the society, when one can buy money or time. One may also think that morality is simple being responsible for one's actions, avoiding harm to others, when one can compensate them for their pain when one cannot. One may think that morality is simply doing whatever produces the greatest good for the greatest number ; one may believe that morality is nothing more than maximising one's wealth. One may believe any of these things but one has a moral compass that directs one in one's daily life . One should have the sense that sometimes, at least, the ends do not justify the means and that sometimes, at least, the ends themselves are not worth pursuing. But the corporation has one end to maximise its stock value. The directors and employees of corporation that animate it does so with this end in mind. Corporations have no mechanism called systems or beliefs. The result is that corporations are able to act without morality or accountability for they are formed for that one purpose to maximise pecuniary shareholders' value. Therefore, to maintain the sanctity of a corporate self, the corporations are required to follow a moral and ethical suit that has become more pronounced in the present scenario and has indeed exceeded the axiom of wealth maximisation.

Corporate Governance

Corporate governance is traditionally defined as the system of laws, regulations and practices, which will promote enterprise, accelerate performance and ensure accountability. It stimulates for effectiveness in the performance and operations of a corporate entity. The effectiveness, in today's parlance, means that business is run in a manner to enhance stakeholders' value, skewing radically from established enhancement of only shareholders' value and moving towards stakeholders' value maximization.

According to the Institute of Company Secretaries of India, "Corporate Governance is the application of best management practices, compliance of law in true letter and spirit and adherence to ethical standards for effective management and distribution of wealth and discharge of social responsibility for sustainable development of all stakeholders."

What is Good Governance?

A question arises that what is actually good Corporate Governance-is it more governance or less governance? The situation we face about bad governance is not actually bad governance but is that of "crisis of governability." The crisis we face now as a result of over regulation and under performance of both the public and private sectors of the economy over so long period is a crisis of Governance Short-term gains had taken over the long term vision and goal. Corporates have tried to capitalize on such grounds, which are proper from one angle but unethical from another, and finally land in a situation called Dharma Sankata. The concept of dharma sankata is well known in the Hindu religion. Narova Kunjarova (human or elephant) was the situation where Yudhistra in Mahabharata lied. For the sake of getting a short-term benefit, resorting to lies or straying from the straight and narrow path ultimately leads to a long-term failure. I would, therefore, suggest that even at the cost of sacrificing short term benefits, it is better for an enterprise to adopt healthy practices. Governance is about not merely ownership; even an owner has to learn to govern. Corporate Governance is a way of life and not a set of rules. A way of life that necessitates taking into account the shareholders interest in every business decision.

Governance and Ethics

Corporate governance is about ethical conduct in business. Ethics is concerned with the code of values and principles that enable a person to choose between right and wrong, and therefore, select from alternative courses of action. Further, ethical dilemmas arise from conflicting interests of the parties involved. In this regard, managers make decisions based on a set of principles influenced by the values, context and culture of the organization. Ethical leadership is good for business as the organization is seen to conduct its business in line with the expectations of all stakeholders.

In Sanskrit, an ethical value can be defined as Dharma. Dharma is a standard or norm of conduct derived from the way in which we wish ourselves to be treated. The 'Dharma' mandates for behavior and attitude, though commonly found n religious scriptures, in fact, trace their source to pragmatic commonsense ethics, which religious ethics confirm. Hence, the values such as amanituam, arjavam, antra sauncam etc. have the potential of leading us to the discovery of fulfillment in our life. These natural and universal standards are the basic blocks for governance, not only at individual or societal level but can well be extrapolated in application to business governance. Governance, per se, is a deliberate manitestation of a set of values or beliefs and should be based upon these dharmic values.

In the row, the last verse of Gita refers to a value as dhruva nitih, constant justice and ethical sense. It emphasizes that no system, no society, can be healthy without unwavering justice and ethical sense. This is the value, which holds the scale between individuals and individuals, between groups and groups; by favouring one individual or group and discriminating against another individual or group, we increase injustice in society, increase social discontent, and pave the way to eventual social chaos. Hence, the citizens, as much as the administration, must be imbued with justice and ethical sense. This value referred to above as dharma, is presented by Indian philosophy as the principle that integrates man with man in society. It is basically a by-product of the spiritual growth of the individual citizen, which is expressed as moral law, and which is reinforced by the state laws and regulations. A respect for law and the constant effort to uphold it, on the part of the citizen and of the holders of power in the state, are what make for human integration and the strength and stability of a state, more especially of a democratic state like ours. It is the awakened moral sense in the citizen that expresses itself as human values and that makes the laws and regulations of the state effective. If the moral sense is absent, the laws become ineffective, as the citizens twist the laws to suit one's own advantage. This increases injustice in society and weakens the political and social fabric. If the moral sense is not present, social contracts become ineffective; for it is the moral sense that motivates one to stick to a contract; without it, the contractor or contractee can, and will, flout it. In this manner, ethics and moral values play a vital part in social existence. Corporates as an integral part of society should also be corporate governance governed by commissioning this ethical and moral factor in their culture.

A corporate does not have any ethics or ethical behavior of its own but is reflected in that of its management and people running the corporate. Ethics is and has to be personal. It is as personal as colour of one's skin. No two persons will have same ethics as a benchmark. It is something which comes from personal integrity, values, culture, education and family background. However, ethical behavior begins and top, ie, at board level. The principles of business or professional ethics could include avoiding conflict of interest, keeping all sensitive business information as confidential, providing full disclosure openly and honestly without loss of data integrity and maintain loyalty and respect for the organization.

Enron's debacle has shaken the roots of corporate governance through the practices revolving around auditors independence, audit committee functioning, corporate ethics and accounting obfuscation. "Enron has been like a lightning bolt, shooting through corporate America, It has changed the whole world of corporate governance. It has caused directors to examine their roles and responsibilities and dedicate more time and energy to their fiduciary responsibilities. At home, the unearthing of Stayam's staya reveals it all.

After the unpleasant episodes in corporate America , India and elsewhere in the world, many researches and debates concluded that it was the result of CEO's or CFO's personal greed and lack of integrity. No organisation that is founded on a strong base of values can expect to sustain, let alone grow, over a long period. The concept of corporate responsibility has gained importance in last five years and it appears that many companies are now 'back to basics' in management focusing on value based management.

The failure to implement good governance procedures has a cost beyond mere regulatory problems. Companies that do not employ meaningful governance procedures will have to pay a significant risk premium when competing for scare capital in today's public markets. The failure to implement good governance can have a heavy cost beyond regulatory problems. Evidence suggests that companies that do not employ meaningful governance procedures can pay a significant risk premium when competing for scarce capital in the public markets. In fact, recently stock market analysts have acquired an increased appreciation for the correlation between governance and returns. In this regard, an increasing number of reports not only discuss governance in general terms, but also have explicitly altered investment recommendations based on the strength or weakness of a company's corporate governance infrastructure.

The biggest victim of lack of ethics or ethical lapse are stakeholders. This may lead to decline in productivity, lower morale of people, low loyalty, theft and frauds.

Unethical business practices lead to financial losses and could be construed to cover:

            >>> Commissions/benefits

            >>> Procurement frauds

            >>> Misappropriation of Funds/Assets

            >>> Manipulation of Company Data/Records.

            >>> Stealing Cash/Company assets.

            >>> Unofficial use of Company's material/human assets.

            >>> Activities violating Company policies.

In recent times, unethical business practices have unfortunately assumed gigantic proportions in Indian businesses causing great loss to shareholder value. Often the malady, if checked in time, can be curtailed and the losses minimized. This has prompted several Indian companies to adopt prevention as well as detection systems to arrest this agonizing trend.