GROUP NO 2

Project Report Self Regulation and Business Ethics

Legal Aspects of Management

Submitted By
Moitrayee Majumdar (wmp7104) Nitin Kumar Tonk (wmp7105) Vikram Arora (wmp7136) Dipyaman Paul (wmp7093) Dibyendu Dhara (wmp7092)

2011

IIM LUCKNOW, NOIDA CAMPUS

Project Report on Self Regulation and Business Ethics

Tasks Assignment: Note: Vikram Arora is the coordinator and responsible for coordination among group members as well as with the professor. He will help other members in finalizing the project. Use this template, text your inputs and send it to Vikram for final compilation. Dead Line is Sunday evening (20/11/11). 1. Introduction 2. Status of the problem/ International and national (Moitrayee) 3. Legal measures adopted ---------------------------------------(Dipyanman) 4. Compliance and Enforcement mechanism and their effectiveness 5. Role of Judiciary (Nitin)

6. Role of NGOs/Civil Society Groups and Business/Industry Associations (Dibyendu) 7. Your Views- how the project is relevant for you a business manager 8. Conclusion (Vikram) & Suggestions

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1 INTRODUCTION

Despite the recent rash of corporate scandals and the resulting rush to address the problem by adding more laws and regulations, seemingly little attention has been paid to how the nature of rules may or may not affect ethical decision making. Drawing on work in the law, business ethics, management and self regulations, this project explores how several characteristics of rules may interface with the process of reaching and implementing ethical decisions. Such a relationship would have practical implications for regulatory policy and managers of organization. The idea of self-regulation within legislative parameters can be interpreted as a move away from state responsibility and as a form of deregulation.Regulating self-regulation has always meant more emphasis on persuasion, such as collaboration, training and education, than on development or enforcement of any existing regulations. The self-regulatory approach in general include its inability to take account of relatively new forms of work, such as that associated with the private service sector, outsourcing work intensification and the casualization of work; its assumption of common interest in the workplace, which ignores unequal power between capital and labor; and the lack of recognition of the role of criminal law, largely because of this assertion of common interest. Alongside a deregulatory tendency ushered in by globalization and economic liberalism and not unconnected with it was a growing pressure on business to behave in a socially responsible manner. In a global economy, business itself is more pervasive and more powerful, while at the same time the power and scope of government was seen to be dismissed and heightened media activity led to far reaching criticisms of business. As well the move to a goal setting approach to employer responsibilities with fewer resources allocated to say inspection and enforcement in favor of more workplace initiatives, made promotion for corporate social responsibility (CSR) increasingly attractive for government agencies, in turn making it easier to justify self-regulation.

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1.1 LAW AND ETHICS

Law is a code of conduct which the authority in power prescribes for society. It basically differs from ethics in its option to use force if and when necessary and by the fact that it is backed by power. Laws are, by and large, fair and moral. But it is not easy to accept that laws can be the foundations of ethics, or even that laws can ensure ethical behavior. There are many situations in life, where just following the law does not make one ethical. For example, if your next door neighbor has just today lost their only son in a motorcycle accident, just when you wanted to celebrate the birthday of your only son with gaiety, music, guests, enjoyment and much merry making, there is no law to prohibit you from doing so. If you decide not to, it is because of the dictates of your conscience, not because of the dictates of the law. Your conscience, your ethical value system and your principles forbids you to rejoice when someone else nearby is in sorrow. The law has no role to play in such a situation. Moreover, not all laws have moral choice. There are many laws which do not involve any ethicality questions - for example, we are required to walk on the left hand side of the road. This is done to ensure traffic control and the traffic discipline, but a question of ethics is not involved here. Again, all moral and ethical actions do not involve the law. For example, it is ethical to love and respect your parents, but there is no law for it, except when they are deliberately mistreated by their children. Law represents the minimum standards of behavior expected from people. Merely following the law, does not make one ethical. Another aspect of the legal system is that it prohibits us of certain actions. It also spells out the negative consequences of our not following the law - that is legal punishment. However, ethical behavior encourages us to do certain things and explains the benefits, i.e., the positive aspects of this ethical behavior. For example, the law tells us not to steal, not to kill, but ethics tells us to do good, speak the truth, help others in distress.

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Thus there is a positive aspect inherent in ethical behavior, whereas the law is more concerned about negative behavior. Yet another aspect of the law is that ethics precedes the action, the law follows it. Ethics tells us what we should strive to develop in ourselves (high moral standards), on the other hand, law tends to be more concerned with the consequences of the negative action - what punishment would follow, who is guilty and how shall justice be done. Moreover, the law is a universally accepted, published document, whereas ethics do be not yet have a universally accepted, consistent and published concept - it is abstract, culture specific and left to the individual for interpretation and action. Again, the law clearly specifies what action would be taken against a person if he or she violates the provisions of the legal system. But, in case of ethics, there is no specific outcome of an unethical action. What would be the consequences of an unethical action is not very clear, not always the same and not universally accepted. An unethical action may have many repercussions and widespread consequences. Some Laws have nothing to do with morality because they do not involve serious matters. These include parking laws, dress codes and other laws covering similar matters.

1.2 Relationship between Ethics & Law

Perhaps the easiest way to think about the relationship between business ethics and the law is in terms of a Venn diagram. If we think of the law as reflecting society's minimum norms and standards of business conduct, we can see that there is a great deal of overlap between what's legal and what's ethical. Generally speaking, most people believe that law-abiding behavior is also ethical behavior. But there are many standards of conduct agreed upon by society that are not codified in law. For example, conflicts of interests may not be illegal, but they are generally considered to be unethical in our society and are commonly covered in codes of ethics. So, the domain of ethics

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includes the legal domain but extends beyond it to include the ethical standards and issues that the law does not address. Finally there are times when you might encounter a law that you believe is unethical. For example, not so long ago racial discrimination was legal in the United States. Therefore, the legal and ethical domains certainly overlap to a large degree, but not completely. It is conceivable to think of something as being legal and unethical, or unethical but not covered by law.

LAW

Ethics

Overlap area

1.3 NATURE OF ETHICS IN BUSINESS

1. In business activities, most ethical questions could be of two types---overt and covert. Overt ethical problems like bribery, theft, sabotage etc are clear for everyone to see and are generally considered reprehensible. Covert ethical problems are more complex, types of problems occur in corporate acquisitions, marketing and personnel policies, capital investment, market war etc. They are difficult to locate, to eliminate and are consequently much more dangerous and threatening to business.

2. For a decision to be ethical, it should possess the following characteristics. It should be: (a) RIGHT- that which is morally correct and due;

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(b) EQUITABLE-that which is just and equal; (c) GOOD-that which brings in the highest good for all concerned; (d) PROPER-that which is appropriate and acceptable; (e) FAIR-that which is honest and due; (f) JUST-that justice is not only done; but is also seen to have been done.

3. Ethics is unstructured, i.e., it does not have a structured format or framework. It is abstract in concept. Hence it does not have universal acceptance, mainly because: a. Ethics depends upon our moral standards; b. Moral standards depend upon our value system; c. The value system of people depend upon their background & childhood experience; & d. The background & experience of people are vastly different. Hence the ethical practices of people are also different.

4. Ethical decisions should express some obligations to others. The very concept of being ethical means that it results in some well for the larger society and not just for oneself.

1.4

CHARACTERISTICS OF BUSINESS ETHICS

1. Ethical decisions differ with the individual perspective of different persons. Each person views the ethical question in terms of his or her own frame of reference. And this frame of reference is the persons own unique value system. Hence ethical decisions do not have unique solutions, but a multitude of alternatives. For example, In case of a Dam building project, the company loses Rest. 2 lac per day, if operations are stopped. One day during work, it is found that a worker is missing inside the dam. Work will definitely be stopped to search for the missing man. However, if the man is not found within a day or two, how long should work be stopped, inspire of the losses to the company, will depend upon the value system of the manager & what according to him is the ethical thing to do. Given the same situation, but a different manager, work will be stopped only unto what that manager thinks is the ethical course of action, or work may not be stopped at all.

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2. Ethical decisions are not limited only to them, but affect a wide range of other situations as well. Similarly, unethical decisions do not end in themselves, but have widespread consequences. One ethical action is like a pebble thrown into a pond of water, it produces endless ripples in the pond, until it disturbs the water in the entire pond. Similarly the single unethical action is not limited to the individual in the company who commits it, but spreads within the entire organization and one unethical organization affects the entire industry.

3. Most ethical decisions involve a trade-off between costs incurred & benefits received. It needs to be clearly understood that costs & benefits, profits & responsibilities are two ends of a single spectrum. Both cannot be mixed simultaneously .If you want some benefits for your organization or for yourself; you need to incur some costs or make some sacrifice. Similarly, maximum profits cannot go hand in hand with maximum social responsibilities or maximum welfare obligations. Maximum concern for task or productivity cannot go hand in hand with maximum concern for people. There has to be a trade-off, a compromise. And this compromise, where it is done, how it is done, results in a decision being ethical or unethical. One cannot get everything for nothing.

4. The consequence of most ethical decisions is not clear. They are ambiguous in nature. The only certainty is that somewhere, sometime, somehow, something positive would result from an ethical decision and something negative from an unethical one. The consequences of both may not be immediate and may not be clear.

5. Every person is individually responsible for the ethical or unethical decision & action that he or she takes. Taking an ethical or unethical decision cannot be an impersonal activity as it involves the persons individual & unique value system along with his moral standards. The same is the case with ethical or unethical actions. Every person has to take decisions, & whether this decisions are ethical or unethical, will depend upon his own conscience & upon what he is comfortable with. His own value must justify his actions .For example, In case of parliamentary democracy, during a vote of confidence of a government, if the prime minister of the country pays bribes to a few independent MPs to buy their votes in the favor of the government, he is doing so, not for his own sake alone, but to save the entire government. In other words, the unethical action & decision of bribery, is taken on behalf of the entire government, & not merely on his own

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behalf. Yet he alone is personally & individually responsible for the crime, & not his entire government. Ex: in Hindu mythology Rants (Sage Valrico).

6. Ethical decisions are voluntary human actions .A person cannot escape his personal liability for his crimes by saying that he was forced to pay the bribe in order to get the job. All human beings have the freedom of choice & of free will. Even under compelling situations, many men have refused to divert from the ethical way of life. Hence, no one can excuse himself or herself of his or her actions by citing force of circumstances or pressure of men for his or her unethical activates. Hence all ethical or unethical actions are supposed to result from voluntary human actions & not from situations beyond their control.

2 Status of the problem/ International and national

Human rights: y Business should support and respect the protection of internationally proclaimed human rights. y Make sure they are not complicit in human rights abuses. Labour: y Business should uphold the freedom of association and the effective recognition of the right to collective bargaining. y The elimination of all forms of forced and compulsory labor. y The effective abolition of child labor. y Eliminate discrimination in respect to employment and occupation. Environment: y Business should support a precautionary approach to environmental challenges. y Undertake initiatives to promote greater environmental responsibility. y Encourage the development and diffusion of environmentally friendly technologies. Anti-corruption: y Businesses should work against all forms of corruption, including extortion and bribery (Source: www.unglobalcompact.org)

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2.1
2.1.1

Problem and Codes of Business Conduct

CORPORATE GOVERNANCE: RELATIONSHIPS WITH SHAREHOLDERS

A trusting relationship between management and shareholders is critical. Investors and lenders must be satisfied with the manner in which shareholders oversee the performance of management and participate in key decisions. Sound principles of corporate governance include the following: y y y y y y
2.1.2

Delineating in the company charter the respective roles and responsibilities of both management and shareholders. Transparency of voting rules. Respect for the rights of minority shareholders. Open communications with shareholders through the provision of audited accounts and information about the progress and operations of the company. A well-functioning board of directors who have the skills, the time, and the access to information needed to discharge its responsibilities effectively. The board will act in a fiduciary capacity on behalf of all the shareholders.

RELATIONSHIP WITH EMPLOYEES

Enterprises have an important responsibility towards their employees. A number of basic principles typically guide the attitudes of successful enterprises toward their employees: y y y y y y Due regard for labor laws. Commitment to adequate standards of worker health and safety. Non-discrimination in the recruitment, compensation, and promotion of employees. Respect for the rights of workers to engage in union activity. Effective systems for consultation with employees on employment conditions and other issues that affect the employees. Clearly stated and transparent policies relating to compensation, benefits, promotions, and other employment conditions. Commitments by the enterprise for contributions to pension plans; and strict protection of the integrity of company-sponsored pension plans.

These principles do not limit the right of an enterprise to enforce discipline on its labor force or to terminate workers in accordance with applicable law.

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2.1.3

RELATIONSHIP WITH OTHER ENTERPRISES

A relationship of mutual trust in which all parties benefit is the most significant aspect of relations between partners in joint ventures, contractual arrangements, or business relations with other enterprises. The reputation of a company is its most valuable asset. Once the reputation of an enterprise is tarnished, it is very difficult to gain trust with the same or other business relations. A number of basic principles that typically promote mutual trust in business relations include: y y y y y Commitment to excellence in products and services; Commitment to gain respect and trust in all business relations; Respect for the sanctity of contracts and business relations; In case of a commercial dispute, a willingness to negotiate and compromise in order to reach an amicable solution. Respect for the sanctity of rule of law, including abiding in a timely manner with decisions of any court, arbitral panels, or other administrative bodies.
RELATIONSHIP WITH THE GLOBAL COMMUNITY

2.1.4

As a company is an integral part of the community in which it operates, a sound relationship with the community is essential. Caring for the environment is a responsibility of the enterprise towards the immediate community, but it also extends to all communities and areas whose environment may be affected by the enterprises activities. Enterprises must: y y y y
2.1.5

Be sensitive to concerns of the local population; Communicate with the local population; Abide by all applicable environmental laws and regulations; and Show tolerance for people of other cultures, races, beliefs, and countries.
RELATIONSHIP WITH GOVERNMENT AUTHORITIES

Well-managed enterprises are law abiding enterprises. To maintain a sound relationship with governmental authorities, enterprises must: y y y y Pay all taxes that are owed and due; Abide by all mandatory government and local regulations; Obtain all governmental permits, licenses, and approvals required to do business; Deal with government authorities on an arms length basis, and make no attempts to improperly influence governmental decisions;

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Establish transparent procedures regarding transactions engaged in by enterprises with any government agency or official or in dealings with any enterprise owned or controlled by a government agency or official; and In transactions with any government agency or officials or with any enterprise owned or controlled by a government or government official, include appropriate provisions to ensure compliance with international or national codes against extortion and bribery.
PREVENTION OF EXTORTION AND BRIBERY

2.1.6

Principles concerning prevention of extortion and bribery are intended as a method of self-regulation by businesses. The voluntary acceptance of these principles by enterprises will not only promote high standards of integrity in business transactions, whether between enterprises and public bodies or between enterprises themselves, but will also protect enterprises that are subject to attempts at extortion. The business community objects to all forms of extortion and bribery. The highest priority should be directed to ending extortion and bribery involving politicians and senior officials. Bribery and extortion threaten democratic institutions and cause grave economic distortions. All enterprises should observe both the letter and spirit of the following rules: y y y No one may, directly or indirectly, demand or accept a bribe; No enterprise may, directly or indirectly, offer or give a bribe, and any demands for such a bribe must be rejected; Enterprises should take measures reasonably within their power to ensure that any payment made to any agent represents no more than an appropriate remuneration for legitimate services rendered by the agent; that no part of any such payment is passed on by the agent as a bribe or otherwise in contravention of these principles; All financial transactions must be properly, accurately, and fairly recorded in appropriate books of account available for inspection by the board of directors as well as by auditors. Enterprises must take all necessary measures to establish independent systems of auditing in order to bring to light any transactions that contravene these principles. The enterprise must then take appropriate corrective action; The board of directors of the enterprise should periodically review compliance with these principles, and take appropriate action against any director or employee who acts in a manner inconsistent with these principles; Contributions to political parties or to individual politicians may be made only in accordance with applicable law, and in accordance with all applicable requirements for public disclosure of such contributions.

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2.1.7

CREATION OF A CULTURE THAT FOSTERS SOUND BUSINESS STANDARDS AND CORPORATE PRACTICES

Ultimately, for an enterprise to live by sound business standards and ethical practices it must develop a culture that fosters such standards of integrity. This effort must be led by management and key shareholders. Steps that management and key shareholders may take to promote this positive attitude throughout the company include: y y y y The preparation and dissemination within the company of a code of conduct for employees; Employee training; Encourage proper conduct and sanctions against misconduct; and Creation of an ethics office and ethics officers to advise and educate employees, and provide guarantees for confidential counseling.

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