52 Corporate Governance and Business Ethics
53 Part A — Corporate Governance
53.1 Meaning
Corporate governance is the system of rules, practices and processes by which a company is directed and controlled (oecd2023?). The Cadbury Committee (UK, 1992) gave the foundational definition: corporate governance is “the system by which companies are directed and controlled”.
Three working pillars:
- Direction — strategic vision and risk management.
- Control — internal controls, audit, compliance.
- Accountability — to shareholders, regulators, society.
53.2 Theoretical Perspectives
| Theory | Working content |
|---|---|
| Agency theory (Jensen & Meckling, 1976) | Manager-shareholder conflict; governance reduces agency cost |
| Stewardship theory | Managers are stewards aligned with shareholder interests |
| Stakeholder theory (Freeman, 1984) | Firm accountable to all stakeholders, not only shareholders |
| Resource Dependence theory | Board provides resources, networks, legitimacy |
53.3 Principles of Good Corporate Governance — OECD
The OECD/G20 Principles of Corporate Governance (revised 2023) set the global benchmark (oecd2023?):
| Principle | Working content |
|---|---|
| Effective framework | Sound legal, regulatory and institutional framework |
| Rights of shareholders | Voting, information, equitable treatment |
| Equitable treatment of shareholders | Including minority and foreign shareholders |
| Role of stakeholders | Recognise rights of employees, creditors, suppliers, community |
| Disclosure and transparency | Timely and accurate financial and non-financial information |
| Responsibilities of the board | Strategy, oversight, integrity |
| Sustainability and resilience | Climate-related and ESG considerations |
53.4 Corporate Governance in India
India’s framework rests on the Companies Act, 2013, SEBI (LODR) Regulations, 2015 and various committee reports (sebi2024?):
| Committee | Year | Key recommendations |
|---|---|---|
| Kumar Mangalam Birla Committee | 1999 | Mandatory and non-mandatory recommendations; led to Clause 49 of the Listing Agreement |
| N.R. Narayana Murthy Committee | 2003 | Audit committee, related-party transactions, whistle-blowing |
| J.J. Irani Committee | 2005 | Inputs to the Companies Act, 2013 |
| Adi Godrej Committee | 2012 | Aligned governance practices |
| Uday Kotak Committee | 2017 | Independent directors, board composition, splitting of Chairperson and CEO roles |
53.5 Major Provisions in India
| Matter | Provision |
|---|---|
| Independent directors | Section 149; min one-third of Board for listed companies |
| Women director | At least one woman director — Section 149(1)(b); two for top-listed companies |
| Audit committee | Section 177; majority of independent directors |
| Nomination & Remuneration Committee | Section 178 |
| Stakeholders Relationship Committee | Section 178 |
| Risk Management Committee | SEBI LODR Reg. 21 — for top-listed entities |
| CSR Committee and 2 % spend | Section 135 |
| Vigil mechanism / whistle-blower policy | Section 177(9), SEBI LODR |
| Board evaluation | Schedule IV — annual performance evaluation |
| Insider trading | SEBI (Prohibition of Insider Trading) Regulations 2015 |
53.6 Anglo-Saxon vs German vs Japanese Models
| Model | Country | Working content |
|---|---|---|
| Anglo-Saxon | USA, UK | Single board; dispersed shareholders; market for corporate control |
| Continental / German | Germany, the Netherlands | Two-tier board (management + supervisory); banks and labour have voice |
| Japanese | Japan | Keiretsu (group) cross-holdings; lifetime employment; main bank relationship |
54 Part B — Business Ethics
54.1 Meaning
Business ethics is the application of moral principles to business decisions and conduct. It examines what is right and wrong in commerce — beyond what is merely legal (robbins2022?; kapoor2023?).
| Level | Working content | Examples |
|---|---|---|
| Macro / Systemic | Ethics of the economic system | Capitalism, regulation, fair trade |
| Meso / Corporate | Ethics of the firm | Corporate codes, governance |
| Micro / Individual | Ethics of the individual | Honesty, integrity in role |
54.2 Ethical Theories
| Framework | Core idea | Proponent |
|---|---|---|
| Utilitarianism | Greatest good for the greatest number | Bentham, Mill |
| Deontological / Duty ethics | Right action is according to moral rules | Kant |
| Virtue ethics | Cultivate virtuous character | Aristotle |
| Rights theory | Respect inviolable rights | Locke, Nozick |
| Justice theory | Fair distribution and procedure | Rawls (1971) |
54.3 Sources of Business Ethics
- Religious traditions (Christian, Islamic, Hindu, Buddhist, Jain, Sikh ethics).
- Cultural and social norms.
- Personal values of leaders.
- Codes of conduct and codes of ethics.
- Legal framework — sets a floor, not the ceiling.
54.4 Ethical Issues in Business
| Domain | Issues |
|---|---|
| Marketing | Misleading advertising, predatory pricing, deceptive packaging |
| HR | Discrimination, harassment, unfair dismissal, child labour |
| Finance | Insider trading, accounting fraud, tax evasion |
| Production | Product safety, environmental harm, hazardous waste |
| IT | Privacy, data protection, cyber-security |
| Procurement | Bribery, kickbacks |
| Strategy | Unfair competition, cartels, predatory acquisitions |
54.5 Famous Corporate Scandals
- Enron (USA, 2001) — accounting fraud; collapse of Arthur Andersen; led to Sarbanes-Oxley Act 2002.
- WorldCom (USA, 2002) — $11 billion accounting fraud.
- Satyam (India, 2009) — ₹7,800-crore accounting fraud; led to Companies Act 2013 reforms.
- Volkswagen (Germany, 2015) — emissions test rigging.
- Wells Fargo (USA, 2016) — fake accounts.
- PNB-Nirav Modi (India, 2018) — banking fraud.
- IL&FS (India, 2018) — debt and governance failure.
54.6 Corporate Social Responsibility (CSR)
CSR is the firm’s commitment to act ethically and contribute to economic development while improving the quality of life of employees, families, the community and society at large (World Business Council for Sustainable Development).
India was the first country in the world to make CSR spending statutory. Section 135 of the Companies Act 2013 requires companies meeting prescribed thresholds (net worth ≥ ₹500 crore, turnover ≥ ₹1,000 crore, or net profit ≥ ₹5 crore) to spend at least 2 per cent of average net profits of the immediately preceding three years on CSR activities listed in Schedule VII.
Activities include eradicating poverty, promoting education, gender equality, environmental sustainability, protection of national heritage, sports promotion, contributions to PM-CARES, and contributions to incubators and research.
Carroll’s CSR pyramid — economic → legal → ethical → philanthropic responsibilities — remains the standard textbook framework.
54.7 Codes of Ethics and Whistle-Blowing
A code of ethics is a written statement of the firm’s values, principles and standards of behaviour. Most large Indian companies (Tatas, Infosys, Wipro, ITC) maintain codes; SEBI requires listed companies to publish a code of conduct.
Whistle-blowing — internal disclosure of wrongdoing — is protected under Section 177(9) of the Companies Act 2013 and the Whistle Blowers Protection Act, 2014.
54.8 Exam-Pattern MCQs
Q1. Which committee gave the foundational definition of corporate governance — “the system by which companies are directed and controlled”?
A. Kumar Mangalam Birla Committee B. Cadbury Committee (UK, 1992) C. Uday Kotak Committee D. Naresh Chandra Committee
Answer: B. The 1992 Cadbury Committee report is the foundational reference.
Q2. Match each ethics framework with its proponent:
| Framework | Proponent | ||
|---|---|---|---|
| (i) | Utilitarianism | (a) | Aristotle |
| (ii) | Deontology | (b) | Bentham and Mill |
| (iii) | Virtue ethics | (c) | John Rawls |
| (iv) | Justice theory | (d) | Immanuel Kant |
A. (i)-(b), (ii)-(d), (iii)-(a), (iv)-(c) B. (i)-(a), (ii)-(b), (iii)-(c), (iv)-(d) C. (i)-(c), (ii)-(d), (iii)-(b), (iv)-(a) D. (i)-(d), (ii)-(c), (iii)-(a), (iv)-(b)
Answer: A.
Q3. Mandatory CSR spending in India under Section 135 of the Companies Act, 2013 is at least:
A. 1 per cent of average net profits of the preceding three years B. 2 per cent of average net profits of the preceding three years C. 5 per cent of net profits of the current year D. 10 per cent of turnover
Answer: B. 2 per cent of average net profits of the immediately preceding three financial years.
Q4. Match each Indian governance committee with its year:
| Committee | Year | ||
|---|---|---|---|
| (i) | Kumar Mangalam Birla | (a) | 2003 |
| (ii) | Narayana Murthy | (b) | 1999 |
| (iii) | Adi Godrej | (c) | 2017 |
| (iv) | Uday Kotak | (d) | 2012 |
A. (i)-(b), (ii)-(a), (iii)-(d), (iv)-(c) B. (i)-(a), (ii)-(b), (iii)-(c), (iv)-(d) C. (i)-(c), (ii)-(d), (iii)-(b), (iv)-(a) D. (i)-(d), (ii)-(c), (iii)-(a), (iv)-(b)
Answer: A.
Q5. The Sarbanes-Oxley Act 2002 was a US legislative response to:
A. The Volkswagen emissions scandal B. The Enron and WorldCom accounting frauds C. The Wells Fargo fake-accounts scandal D. The PNB-Nirav Modi case
Answer: B. SOX 2002 followed Enron (2001) and WorldCom (2002).
Q6. Match each model of corporate governance with its country:
| Model | Country | ||
|---|---|---|---|
| (i) | Anglo-Saxon | (a) | Germany |
| (ii) | Continental | (b) | USA, UK |
| (iii) | Japanese | (c) | Japan |
A. (i)-(b), (ii)-(a), (iii)-(c) B. (i)-(a), (ii)-(b), (iii)-(c) C. (i)-(c), (ii)-(a), (iii)-(b) D. (i)-(c), (ii)-(b), (iii)-(a)
Answer: A.
Q7. “The greatest good for the greatest number.” This principle reflects:
A. Deontology B. Utilitarianism C. Virtue ethics D. Stakeholder theory
Answer: B. Utilitarianism (Bentham, Mill).
Q8. Match each Indian provision with its content:
| Provision | Content | ||
|---|---|---|---|
| (i) | Section 135 | (a) | Independent directors and Audit Committee |
| (ii) | Section 149 / 177 | (b) | CSR — 2 % rule |
| (iii) | SEBI Insider Trading Regulations 2015 | (c) | Whistle-blower protection |
| (iv) | Whistle Blowers Protection Act 2014 | (d) | Prohibition of insider trading |
A. (i)-(b), (ii)-(a), (iii)-(d), (iv)-(c) B. (i)-(a), (ii)-(b), (iii)-(c), (iv)-(d) C. (i)-(c), (ii)-(d), (iii)-(b), (iv)-(a) D. (i)-(d), (ii)-(c), (iii)-(a), (iv)-(b)
Answer: A.
- Corporate governance — system by which companies are directed and controlled (Cadbury 1992).
- Theories: Agency (Jensen-Meckling), Stewardship, Stakeholder (Freeman), Resource Dependence.
- OECD Principles (revised 2023): framework, rights of shareholders, equitable treatment, stakeholders, disclosure, board responsibilities, sustainability.
- Indian framework: Companies Act 2013, SEBI LODR 2015.
- Key Indian committees: Birla 1999, Narayana Murthy 2003, Irani 2005, Godrej 2012, Kotak 2017.
- Key sections: 149 (independent + women director), 177 (audit + vigil), 178 (NRC + stakeholders), 135 (CSR), 134 (Board’s report).
- Three governance models: Anglo-Saxon (USA/UK), Continental/German, Japanese.
- Business ethics frameworks: Utilitarian (Bentham/Mill), Deontology (Kant), Virtue (Aristotle), Rights (Locke/Nozick), Justice (Rawls).
- Famous scandals: Enron, WorldCom, Satyam (2009), VW, Wells Fargo, PNB-Nirav Modi, IL&FS.
- CSR Section 135: ≥ 2 % of average net profits of preceding 3 years for firms above thresholds; activities under Schedule VII.
- Carroll’s CSR pyramid: economic → legal → ethical → philanthropic.
- Whistle-blower protection: Sec. 177(9), Whistle Blowers Protection Act 2014.