53  Corporate governance and business ethics

53.1 Concept of Corporate Governance

Corporate governance is “the system by which companies are directed and controlled” (Cadbury Committee, 1992). It deals with the relationships among the board, management, shareholders and other stakeholders. It answers the central question: how to ensure that those who manage the company act in the interests of those who own it. The framework rests on four pillars: transparency, accountability, fairness and responsibility. Sound governance reduces agency cost, lowers cost of capital, attracts investment, and protects against scandals. India’s framework rests on the Companies Act 2013, SEBI LODR 2015, and recurring committee reports (Kumar Mangalam Birla, Naresh Chandra, Narayana Murthy, Kotak).

53.2 Why Corporate Governance Matters

TipImportance of Corporate Governance
  • Reduces agency cost — aligns managers with shareholders.
  • Protects minority shareholders and other stakeholders.
  • Improves access to capital and lowers cost of capital.
  • Reduces probability of corporate scandals (Enron, WorldCom, Satyam).
  • Promotes long-term value creation over short-term gimmicks.
  • Enhances brand and reputation.

53.3 Major Indian Committees on Corporate Governance

TipIndian Governance Committees
Committee Year Key recommendation
Kumar Mangalam Birla 1999 (SEBI) Foundational — Clause 49 of Listing Agreement
N.R. Narayana Murthy 2003 (SEBI) Audit committee responsibilities; whistleblower
Naresh Chandra 2002 Auditor independence; CEO/CFO certification
J.J. Irani 2005 Companies Act overhaul (eventually Act 2013)
Adi Godrej 2012 Voluntary guidelines
Uday Kotak 2017 (SEBI) Independent directors; gender diversity; LODR amendments

53.4 Four Pillars of Governance

TipFour Pillars
Pillar Working content
Transparency Open, timely, accurate disclosure
Accountability Board, management answerable to stakeholders
Fairness Equitable treatment of all shareholders, especially minorities
Responsibility Acting in interests of all stakeholders

53.5 OECD Principles of Corporate Governance

The OECD Principles (1999; updated 2015 — known as G20/OECD Principles) provide the global benchmark:

TipSix OECD Principles
  1. Ensuring the basis for an effective corporate governance framework.
  2. Rights and equitable treatment of shareholders.
  3. Institutional investors, stock markets, and other intermediaries.
  4. Role of stakeholders.
  5. Disclosure and transparency.
  6. Responsibilities of the board.

53.6 Indian Legal Framework

TipIndia’s Governance Framework
  • Companies Act 2013 — board composition, independent directors, audit committee, related-party transactions.
  • SEBI LODR 2015 — Listing Obligations and Disclosure Requirements for listed companies.
  • Companies (Auditor’s Report) Order — CARO 2020.
  • SEBI Prohibition of Insider Trading Regulations, 2015.
  • Whistleblower Policy — Sec 177(9) of Companies Act.
  • Business Responsibility and Sustainability Report (BRSR) — top 1,000 listed companies since FY 2022-23.

53.6.1 Board Composition Requirements (Listed Cos)

TipLODR Board Composition Rules
  • Minimum 6 directors (top 1,000 listed companies).
  • At least one woman director; for top 1,000 — at least one independent woman director.
  • At least half the board should be independent if chairperson is executive; at least 1/3rd if chairperson is non-executive.
  • Maximum directorships — 7 listed companies; 3 if person is whole-time director elsewhere.
  • Separation of chairperson and CEO — recommended.

53.6.2 Key Board Committees (LODR)

TipMandatory Board Committees
  • Audit Committee — minimum 3 directors; majority independent; chairperson independent.
  • Nomination and Remuneration Committee (NRC) — at least 3 non-executive; 2/3rds independent.
  • Stakeholders Relationship Committee — chair must be non-executive.
  • Risk Management Committee — for top 1,000 listed companies.
  • CSR Committee — at least 3 directors including one independent; under §135.

53.7 Business Ethics — Part B

53.7.1 Concept

Business Ethics is “the application of moral principles and standards to business behaviour”. It deals with what is right and wrong in business activities — distinct from legality (some legal actions may be unethical; some ethical actions may not be specifically required by law).

53.7.2 Ethical Theories

TipMajor Ethical Theories
Theory Working content
Utilitarianism (Bentham, Mill) Greatest good for greatest number
Deontology (Kant) Acts judged by duty and rules, not consequences
Virtue Ethics (Aristotle) Focus on moral character of the actor
Justice Theory (Rawls) Fairness in distribution; “veil of ignorance”
Ethical Egoism Act in self-interest
Stakeholder Ethics Consider all stakeholders

53.7.3 Sources of Business Ethics

TipSources of Business Ethics
  • Religion and spirituality.
  • Culture and tradition.
  • Law (sets a floor for ethics).
  • Professional codes (ICAI, ICSI, CMA, Bar Council).
  • Organisational code of conduct.
  • Personal values.

53.7.4 Common Ethical Issues in Business

TipEthical Dilemmas
  • Insider trading.
  • Corruption and bribery.
  • Misleading advertising.
  • Discrimination.
  • Unfair labour practices.
  • Environmental damage.
  • Conflict of interest.
  • Earnings manipulation (Enron, Satyam).
  • Whistleblower protection vs retaliation.

53.7.5 CSR and Ethics

Corporate Social Responsibility (CSR) is the voluntary integration of social and environmental concerns into business operations. In India, mandatory CSR spend of 2 % of average net profits is prescribed under Section 135 of Companies Act 2013 for qualifying companies.

53.8 Famous Corporate Scandals

TipFamous Scandals and Their Lessons
Scandal Year Lesson
Enron 2001 (USA) Off-balance sheet entities; Arthur Andersen collapse → SOX 2002
WorldCom 2002 $11 bn accounting fraud
Satyam Computer Services 2009 (India) ₹7,000+ cr fraud by Ramalinga Raju → SEBI reforms
Lehman Brothers 2008 Aggressive accounting; Repo 105; GFC trigger
Wirecard 2020 (Germany) $2 bn missing
IL&FS 2018 (India) NBFC governance; led to RBI scale-based regulation for NBFCs

The Sarbanes-Oxley Act (SOX) 2002 in the US — passed after Enron — mandated CEO/CFO certification of financial statements, audit-committee composition, and the creation of the PCAOB. In India, the Satyam scam triggered the Companies Act 2013 overhaul.

flowchart TB
  CG[Corporate Governance] --> T[Transparency]
  CG --> A[Accountability]
  CG --> F[Fairness]
  CG --> R[Responsibility]
  CG --> B[Board]
  CG --> SH[Shareholders]
  CG --> ST[Stakeholders]
    classDef default fill:#003366,color:#ffffff,stroke:#ffcc00,stroke-width:3px,rx:10px,ry:10px;

NoteDistractor warning

PYQs ask: Cadbury Committee (1992 UK) popularised the definition of corporate governance; Kumar Mangalam Birla (1999) gave India its first SEBI-driven Code through Clause 49.

53.9 Practice Questions

Q 01CadburyEasy

The Cadbury Committee on corporate governance was set up in:

  • AIndia
  • BUK (1992)
  • CUSA
  • DJapan
View solution
Correct Option: B
**Cadbury 1992 (UK)** — foundational definition of corporate governance.
Q 02India committeeMedium

India's first SEBI-driven code on corporate governance was given by:

  • AKumar Mangalam Birla Committee 1999
  • BNaresh Chandra
  • CNarayana Murthy
  • DKotak
View solution
Correct Option: A
**Kumar Mangalam Birla 1999** — Clause 49 of Listing Agreement.
Q 03PillarsMedium

The four pillars of corporate governance are:

  • ATransparency, Accountability, Fairness, Responsibility
  • BProfit, Growth, Risk, Reward
  • CEquity, Debt, Cash, Capital
  • DPlan, Organise, Direct, Control
View solution
Correct Option: A
**T A F R**.
Q 04SOXMedium

The Sarbanes-Oxley Act (SOX) 2002 was passed in response to:

  • ASatyam scam
  • BEnron / WorldCom scandals
  • CLehman collapse
  • DIL&FS crisis
View solution
Correct Option: B
**SOX 2002** — post-Enron US reform.
Q 05India scamMedium

The Satyam scandal in India occurred in:

  • A2001
  • B2009
  • C2015
  • D2018
View solution
Correct Option: B
**2009** — Satyam, ₹7,000+ cr fraud by Ramalinga Raju.
Q 06CSRMedium

Mandatory CSR spend in India is governed by:

  • A§129 of Companies Act
  • B§135 of Companies Act 2013
  • C§148
  • DSEBI Act
View solution
Correct Option: B
**§135** — 2 % of average net profits.
Q 07UtilitarianMedium

"Greatest good for the greatest number" is the principle of:

  • AUtilitarianism (Bentham, Mill)
  • BDeontology (Kant)
  • CVirtue Ethics (Aristotle)
  • DJustice (Rawls)
View solution
Correct Option: A
**Utilitarianism** — Jeremy Bentham, John Stuart Mill.
Q 08DeontologyMedium

Match each ethical theorist with the theory:

Theorist Theory
(i) Aristotle (a) Justice; veil of ignorance
(ii) Kant (b) Utilitarianism
(iii) Bentham/Mill (c) Virtue ethics
(iv) Rawls (d) Deontology
  • A(i)-(c), (ii)-(d), (iii)-(b), (iv)-(a)
  • B(i)-(a), (ii)-(b), (iii)-(c), (iv)-(d)
  • C(i)-(b), (ii)-(a), (iii)-(d), (iv)-(c)
  • D(i)-(d), (ii)-(c), (iii)-(a), (iv)-(b)
View solution
Correct Option: A
Aristotle-virtue; Kant-deontology; Bentham/Mill-utilitarianism; Rawls-justice.
Q 09Clause 49Hard

"Clause 49" of the Listing Agreement dealt with:

  • AFDI
  • BCorporate governance norms for listed companies
  • CAudit fees
  • DInsider trading
View solution
Correct Option: B
**Clause 49** (now subsumed in SEBI LODR 2015) — listed-company governance.
Q 10Audit CommitteeMedium

Under LODR, the Audit Committee chairperson must be:

  • AExecutive director
  • BIndependent director
  • CCFO
  • DPromoter
View solution
Correct Option: B
**Independent director** must chair the Audit Committee.
Q 11OECDHard

The first OECD Principles of Corporate Governance were issued in:

  • A1990
  • B1999 (updated 2015 as G20/OECD)
  • C2002
  • D2013
View solution
Correct Option: B
**OECD 1999**; updated 2015 (G20/OECD Principles).
Q 12Independent DirectorMedium

An independent director under Companies Act 2013 is one who:

  • AHas no material pecuniary relationship with company / promoters / management
  • BIs a promoter
  • CIs appointed by promoters
  • DIs a relative of CEO
View solution
Correct Option: A
No material pecuniary relationship — §149(6) Cos Act 2013.
Q 13KotakMedium

Uday Kotak Committee (2017) recommended:

  • AStrengthening independent directors and board diversity
  • BRemoval of CSR
  • CDemonetisation
  • DGST
View solution
Correct Option: A
Kotak — independence, diversity, LODR strengthening.
Q 14WhistleblowerMedium

Whistleblower policy / Vigil mechanism is required under:

  • A§129 of Companies Act
  • B§177(9) of Companies Act 2013
  • C§134
  • D§148
View solution
Correct Option: B
**§177(9)** — vigil mechanism / whistleblower.
Q 15Ethics theoryMedium

Kant's deontological ethics emphasises:

  • AConsequences
  • BDuties and universal moral rules
  • CProfit maximisation
  • DSelf-interest
View solution
Correct Option: B
**Kant** — categorical imperative; duty-based.
Q 16SEBIMedium

SEBI LODR Regulations were notified in:

  • A2013
  • B2015
  • C2017
  • D2020
View solution
Correct Option: B
**SEBI LODR 2015** — listing obligations & disclosure requirements.
Q 17InsiderMedium

Insider trading in India is regulated by:

  • ARBI
  • BSEBI under PIT Regulations 2015
  • CCBI
  • DMCA
View solution
Correct Option: B
**SEBI Prohibition of Insider Trading (PIT) Regulations 2015**.
Q 18RawlsHard

The "veil of ignorance" is a thought experiment proposed by:

  • AKant
  • BJohn Rawls
  • CBentham
  • DAristotle
View solution
Correct Option: B
**Rawls** — *A Theory of Justice* (1971).
Q 19BoardHard

In a listed company with an *executive* chairperson, the proportion of independent directors must be at least:

  • AOne-third
  • BHalf
  • CTwo-thirds
  • DAll directors
View solution
Correct Option: B
**At least half** — if chairperson is executive; one-third if non-executive.
Q 20AgencyMedium

Corporate governance primarily addresses the:

  • APricing problem
  • BPrincipal-Agent (agency) problem
  • CCapital budgeting problem
  • DManufacturing efficiency
View solution
Correct Option: B
**Agency problem** — owner-manager divergence (Jensen-Meckling 1976).

53.10 Quick Recall

ImportantQuick recall
  • Corporate Governance — system by which companies are directed and controlled (Cadbury 1992).
  • Four pillars: Transparency, Accountability, Fairness, Responsibility.
  • Indian committees: Kumar Mangalam Birla 1999 (Clause 49), Naresh Chandra 2002, Narayana Murthy 2003, Adi Godrej 2012, Kotak 2017.
  • Indian framework: Companies Act 2013, SEBI LODR 2015, PIT 2015, CARO 2020, BRSR (top 1,000 listed companies).
  • OECD Principles 1999 updated 2015 (G20/OECD).
  • Mandatory committees: Audit, NRC, Stakeholders Relationship, Risk Management, CSR.
  • Independent director — at least 1/3 board (non-exec chair) or 1/2 (exec chair).
  • Ethical theories: Utilitarianism (Bentham/Mill), Deontology (Kant), Virtue (Aristotle), Justice/Veil of Ignorance (Rawls), Stakeholder.
  • CSR — §135 Companies Act 2013, 2 % of average net profits.
  • Scandals: Enron 2001 → SOX 2002; Satyam 2009 → Companies Act 2013; IL&FS 2018.