Vision VAM 2020 (Ethics) Corporate Governance
Vision VAM 2020 (Ethics) Corporate Governance
Vision VAM 2020 (Ethics) Corporate Governance
Contents
1. Introduction ............................................................................................................................... 2
13. Previous Year Vision IAS Mains Test Series Questions ........................................................... 11
14. Previous year Vision IAS Mains Test Series Case Studies ....................................................... 23
India adopted Liberalisation, Privatisation and Globalisation reforms in 1991 and successfully
moved towards an open economy. Since then stock markets have seen an increase in size.
Corporate governance has played an important role in the present economic condition of
India.
Corporate Governance is defined as a set of systems, principles and processes which ensure
that a company is governed in the best interest of all stakeholders. It is a system that
comprises of employees, customers, management and shareholders.
Corporate governance has to ensure that companies stick to their vision and mission and
uphold and sustain their core values.
Finally, the Companies Act 2013 made Corporate Social Responsibility (CSR), a mandatory legal
requirement and provided with a legal framework for good corporate governance. The
cultivation of good corporate governance is an ongoing process in India. All these phases
contributed to this process.
India
Corporate governance includes following principles and functions:
• Independence of board of directors to take decisions in best interest of Profits of the
company, People of the society and the Planet (3Ps).
• Fairness in actions in market that ensures trust of the shareholders and investors.
Excessive profit seeking behaviour through fraud practices is against this principle.
• Social responsibility: Good corporate governance requires that the business be done in a
socially responsible manner. Companies should invest in building social and human capital.
Following these principles, good corporate governance becomes a means to support economic
efficiency, usher in sustainable growth and achieve financial stability i.e. the triple bottom-
line. To follow the principles diligently and to function responsibly a good framework is
required.
It has been found that many of the recent corporate governance failures were due to the issues
associated with Independent directors and therefore it requires special attention.
7. Independent Directors
An independent director is defined as a non-executive director of a company who does not
have any fiduciary relationship with the company, and/or has not been an executive with the
company in the three preceding financial years. Independent directors are the “conscience” of
the board.
The number of independent directors is set to a minimum of one third of board strength and
they are required to hold at least one separate meeting in a year without the participation of
non-independent directors. The key role and functions of Independent directors are as
following:
Hence, they are expected to act as a strong instrument to check intended corporate scandals.
However, in the recent past experiences like ILF&S and DHFL disclosed that the independent
directors are not fulfilling their roles and responsibilities.
9. Corporate sustainability
Corporate sustainability encompasses strategies and practices that aim to meet the needs of
stakeholders today while seeking to protect, support and enhance the human and natural
resources that will be needed in the future.
A combination of global practices, existing legal provisions, good to have principles and
forward-looking concepts comprise the next level of corporate governance. Following
recommendations can be considered as what more can be done to achieve Good corporate
governance
• Right board leadership is essential to develop the culture of commitment to integrity,
fairness, honesty transparency and ethical conduct. This culture must be disseminated to
all the employees through training programmes.
• Companies need to put in place clear policies and practices for zero tolerance for bribery,
corruption, anti-corruption practices, to prevent market manipulation, as also precautions
to prevent money laundering.
• The integrity of financial statements is foundation of stakeholder’s trust. The functioning
audit committees is critical to building internal controls. All information should be made
available to auditors, including through direct engagement between audit committees and
auditors.
• The process of de-criminalisation of business laws should be continued.
• Concepts and principles of governance for a company need to embrace all stakeholders,
including the government, lenders, creditors, employees, customers, vendors and the
community.
• OECD Document on Corporate governance reforms: It cites certain immensely valuable
recommendations such as
o Providing training to independent directors on the business of the company
o Improving investor education for better participation at General Meetings
o Improving selection mechanism for independent directors
Good corporate governance, going beyond the letter of law promotes ease of doing business
and thereby adds to growth.
4. What do you understand by corporate ethics? Giving examples, highlight the ethical
issues faced by CEOs in the current competitive environment, with special reference to
government owned enterprises.
Approach:
• Explain what you understand by corporate ethics.
• Mention the ethical issues faced by CEOs in a highly competitive environment.
• Expand on the ethical issues faced by CEOs of state owned enterprises.
• Give examples to substantiate your answer, if any.
Answer:
• Corporate ethics includes proper business policies and practices in corporate
governance regarding issues such as insider trading, bribery, interests of
stakeholders, corporate social responsibilities and fiduciary responsibilities.
• Ethical issues faced by CEOs in a highly competitive environment include adaptation
to new technology and innovation while ensuring that manpower is retained,
transparency, compliance with government rules, ensuring gender equality and
equality of opportunity in the workplace, among others.
5. Has excessive profit seeking by corporates undermined the trust of public in the
private sector? Giving examples, examine the reasons for failure of corporate
governance in India.
Approach:
• In the first part, discuss whether want for excess profits has eroded the trust of
public in the private sector.
• In the second part, mention the reasons behind the failure of corporate governance
using examples wherever possible.
• In the conclusion, briefly talk about the importance of corporate governance.
Answer:
Private sector is largely driven by ‘profits’, which are important for sustainability of
business operations. However, with increasing instances of corporate frauds and crony
capitalism, questions have been raised on the mode of operations of the private sector.
It has also been argued that such illegal and unethical practices are traceable to the
want of excess profits.
Manifestations of such practices include the Satyam scam, Enron Scandal, Financial
Crises of 2008 whereby the public was misled for generating excess profits.
Many see the private sector being driven by self-interest without adequately
acknowledging the interest all stakeholders, especially consumers. India’s telecom
sector is an example. While penetration has increased significantly over the years with
6. Corporate Governance provides a framework that defines the rights, roles and
responsibilities of various groups within an organization. (a) Elaborate the need to
incorporate the principles of Corporate Governance to enhance the effectiveness of
the public sector enterprises. (b) Identify the challenges specific to the public sector
when it comes to the application of good practices of corporate governance.
Approach:
• Give in brief, the definition and framework of corporate governance.
• Throw light upon the need for Corporate Governance in Public Sector Enterprises.
• Highlight the challenges in corporate governance of Public Sector Enterprises.
Answer:
Corporate Governance is defined as a set of systems, principles and processes which
ensure that a company is governed in the best interest of all stakeholders. It is a
system that comprises of employees, customers, management and shareholders.
As per World Bank, ‘Corporate Governance is concerned with holding a balance
between economic and social goals and between individual and community goals.’
9. It takes more than a corporate governance policy to inspire ethical behavior and
sustain a truly ethical workplace. Discuss.
Approach:
• Briefly, describe corporate governance policy.
• Provide arguments to bring out the inadequacy of merely the corporate governance
policy to promote ethical behavior and suggest how to inspire and sustain ethical
workplace.
• Conclude the answer.
Answer:
Corporate governance is the set of mechanisms, rules and practices by which a
corporate entity is run. These usually consist of set standards defining code of conduct
of the employees, the management and the organization- the ways in which they are
expected to act. Important pillars of corporate governance are transparency,
accountability, fairness and protection of stakeholders’ interest. It is expected that it
will ensure the adherence to the legal and ethical practices by all through a compliance
policy and statement of values. A corporate governance policy highlights the
commitment towards the relevant laws, rules and regulations and constitutes a
statement of values, informing the stakeholders about the company’s priorities and
core belief, thus setting behavioral expectations.
Despite good intentions and sound ethical frameworks under corporate governance
policy, the organizations and its employees often do not behave in the manner that the
policy advocates. The test of CG Policy is not merely whether a company explicitly has it
or not. It must be effective and seen to be working. If employees and the company are
not ethical in their day to day behaviour, it denotes a failure of the policy. At the same
time, in critical matters where the company/shareholders indulge in unethical practices
such as insider trading, secretive corruption, etc., then it reflects that those responsible
for enforcement of policy themselves do not believe and follow it. This resort to
unethical practices can be due to the following reasons:
• Inability and psychological fear among employees to raise ethical concerns.
• Excessive pressure to achieve unrealistic performance targets.
• The setting of conflicting goals by the organization provokes a sense of injustice and
unfairness.
• Lack of conscious efforts on the part of leaders to set a positive example. For e.g.
allegations of misallocation of resources by CEO of a reputed bank sets a bad
precedent.
These instances show that the mere creation of an ethical framework is not enough. It
must be backed up by practices such as appointment of auditors who actually maintain
10. Companies adhering to the norms of corporate governance emerge as winners in the
long run. Evaluate with the help of suitable examples.
Approach:
• Briefly discuss the concept of corporate governance.
• Give reasons with examples why such companies emerge as winners in the long
run.
• Justify with examples how companies ignoring corporate governance do not sustain
in the long run.
• Conclude appropriately based on the above points.
Answer:
Corporate governance is the system of rules, practices and processes by which a firm is
directed and controlled. Corporate governance essentially involves balancing the
interests of a company's stakeholders, such as shareholders, management, customers,
suppliers, financiers, government and the community. It also provides the framework
for attaining a company’s objectives and encompasses practically every sphere of
management.
Companies adhering to the norms of corporate governance emerge as winners in the
long run because of following factors:
• Sustainable growth of company: As it maintains transparency, accountability and
responsibility of the decision makers towards all stakeholders. It also involves
abiding by the laws and regulations in letter and spirit and ensuring that all
statutory obligations are discharged on time. For e.g. Tata Group of companies
continues to be one of the biggest conglomerates even after 150 years of its
existence.
• Brings economic efficiency: As companies ensure discipline in financial actions, it
attracts stakeholders’, especially foreign institutional investors and also has a
positive influence on the market value of the company.
• Improved risk management: It encompasses the manner in which board and
committee meetings are conducted and decisions are recorded. This mechanism of
internal control allows better fraud prevention and detection and conflict
resolution between management and shareholder’s interests. E.g. HDFC Bank has
been able to insulate itself from the NPA crisis, owing to its Corporate Governance
Policy.
• Enhances goodwill of the company: Adhering to disclosure norms, regular
updation of records, regulatory requirements like taking care of minority
11. It has been argued that traditional approaches to corporate social responsibility (CSR)
are inadequate. Discuss. Also, examine the role of Social License to Operate (SLO) in
this regard.
Approach:
• Brief introduction about Corporate Social Responsibility.
• Why traditional approach is being questioned?
• How SLO (Social License to Operate) can help overcome the problems with
traditional CSR?
Answer:
Corporate Social Responsibility is a management concept whereby companies integrate
social and environmental concerns in their business operations and interactions with
their stakeholders. CSR is generally understood as being the way through which a
company achieves a balance of economic, environmental and social imperatives. CSR is
a process with the aim to embrace responsibility for the company's actions and
encourage a positive impact through its activities on the environment, consumers,
employees, communities and all other members of the public sphere who may also be
considered as stakeholders. Corporate social responsibility (CSR) has become an
established part of the global corporate landscape. It means when a corporation goes
beyond making profit and engages in actions that results in social good.
However, traditional CSR is failing to deliver for both companies and society. It is often
too peripheral to the core business model, too far from providing real shared value for
the society. Role of private sector in meeting its social responsibility is increasingly
questioned due to various reasons such as:
• Disregard for societal implications: The company generates its profits and creates
value without much consideration for wider societal impact and benefits.
• Lack of intention to serve: It raises funds and makes donations but it has little to do
with how they function as a company. It is often too peripheral to the core business
model and too far from providing real ‘shared value’.
• Eyeing profit and displaying greed: There is also a view that CSR is also seen by
companies from profit motive as it enhances its image in society.
• Lack of specialists: Most corporate either don’t hire specialists for CSR or don’t
have that capacity. This impacts the efficiency of CSR.