For Students


March 13, 2012

CORPORATE GOVERNANCE
And
BUSINESS ETHICS.
     
I find lot of confusion in the minds of management students between the two.  It is sad that many in the industry also think they are one and the same. CORPORATE GOVERNANCE is the operational framework for carrying on business in the corporate form of business organization, while the BUSINESS ETHICS is the philosophical content or philosophical justification of the corporate governance. The object of the corporate governance is maximization of profits while the object of business ethics is to preach  how that profit should be made, how much to be made and how it should be utilized . Both are different but closely related.

Corporate governance as understood in the modern business world is the code of best management practices founded on the tenets of business ethics. Business ethics is the study of GOOD and BAD in the business and for the business. However GOOD in the business should not be confused with moral good. One and only GOOD in the business is to make PROFIT. It is therefore in this context that the business ethics comes into picture to ensure that it does not amount to profiteering, it is maximization of profit through fair trade practices and that such profit is utilized for promotion or protection of interest of various stakeholders in the company.

Traditional definition of corporate governance even according to Economist and Nobel Laureate Milton Friedman is to carry on, control and direct the business in a company by the board of directors for achieving its predetermined mission, broken down into annualized financial and non-financial milestones, in accordance with shareholders desires.  If the management achieves this objective, it is called GOOD corporate governance.  It is just an operational framework or effective management practices employed by the management.

But the MODERN definition of GOOD CORPORATE GOVERNANCE has been widened over the years more importantly by Sir Adrian Cadbury in his Report of 1992 and later on, in India by Kumar Mangalam Birla in his Birla Committee Report of 2000.  It also introduced the canons/tenets of business ethics to control the greed of the Promoters and to promote the long term interest of the business itself. One of the important tenets is  that the objective of  the good governance while pursuing its Dream, should also be for PROMOTION or PROTECTION of the interest of multiple stakeholders, not only the shareholders. Stakeholders include shareholders customers, employees, vendors, investors, suppliers, society, government and environment and also the company itself.

Another canon of the Business Ethics which underlines the modern Corporate Governance is that the process of managing the business should be FAIR, TRANSPARENT AND ACCOUNTABLE to facilitate promotion or protection of the interest of multiple stakeholders. It is important to note that modern corporate governance does not mandate that board of directors should necessarily PROMOTE the interest of ALL the multiple stakeholders. The meaning of FAIR means, treat the multiple stakeholders equitably and not equally. It means, while the board's first duty is to promote the interest of the shareholders as a stakeholder, whose capital you are playing with, but as regards the interest of other stakeholders, the board's minimum duty is to PROTECT their interest. PROMOTION and PROTECTION are not the same thing. The interests of multiple stakeholders, amongst themselves, are highly conflicting and it is not possible to promote the interest of all the stakeholders.

The role of business ethics in modern corporate governance, as said earlier, is to bring in social content into the business of profit-making and introduce public interest or public good. This is also in the larger and long term interest of the business itself. Other tenets of the business ethics underlining the corporate governance are how much profit to make and how it should be made. The rule is maximization of profit by optimum use of the factors of production, resorting to world class manufacture and striving constantly to reduce cost and thereby delivering more and more value to the customers. Method of making profit is equally important tenet.   It should be made through ETHICAL trade practice. Ethical trade practice should not be judged on the moral plane as done in the PERSONAL ETHICS. Morals and the markets do not always go together, because of the meaning of GOOD in Personal Ethics and Business Ethics are different.  Strictly speaking, Ethical practice in business means fair trade practice, legally sound but may not be always morally sound (if at all you have a clear definition of MORAL).

However there is no confusion in law on the meaning of Fair Trade Practice unlike ethical trade practice. FAIR TRADE PRACTICE is one which is not UNFAIR TRADE PRACTICE as defined in law. Unfair trade practice has been extensively and clearly defined under many general laws (like Competition Act or Consumer Protection Act) and also industry specific laws (like Drugs and Cosmetics Act, or Food Safety Act). Mandate is that the Profit should be made without resorting to any unfair trade practice as defined under the law. Utilization of profit so made should be for promotion or protection of interest of the multiple stakeholders, which, as already pointed out, has in the list, the society, government and environment amongst the multiple stakeholders.

In conclusion, study of CORPORATE GOVERNANCE is incomplete without the     in-depth study of Business Ethics. Unfortunately codified rules of modern corporate governance built into clause 49 of the Listing Agreement and by many amendments post-2000 made to the Companies Act 1956, could not capture the spirit of the tenets of Business Ethics explained above.


 Prof. Ram Mallar.

© 2012
Mallarr Law Associates LLP
3, Silver Cascade, 110AA, Near Ruby Mills, Senapati Bapat
Marg, Dadar West. Mumbai 400 028.
Tel. No.: 2432 28413 (3 lines)
Email: mlc@mallarlaw.com.
Website: www.mallarlaw.com

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March 1, 2012.

Is there a difference between 
Personal Ethics of COMMON MAN and 
Personal Ethics of AMBITIOUS PROFESSIONAL 
MANAGER ? 

(Target Audience: Management students graduating in B-Schools and other youngsters who have dreams to achieve)

This is important for management students to know who wants to climb successfully the difficult ladder in the corporate world.

Personal Ethics is the rules of code of conduct built by any person based on what he considers GOOD and BAD, fair and unfair in his life, which is a guide to lead his personal life. ETHICS means study of GOOD and BAD. GOOD and BAD outside the context have no meaning, unless it is used in a context like your personal life or business life or in sport or in other human endeavor.

GOOD in personal life is moral good, desiring to be labelled as a good man in the society. Common man's Personal Ethics is built on this concept of good, which is self-effacing and with the spirit of GIVING, even at the price of his own interest. This kind of moral good in your personal ethics may not help you when you leave your B-school as an ambitious Professional Manager to face the tough business world. This is likely to come in the way of your achieving your dream and taking a tough decision as a manager.

Let us take two examples:

CASE 1:

Anand, after graduating in one of the B-Schools with a goal of becoming President of Marketing Function, having already been placed in one of the good FMCG companies as Vice President-Marketing, now faces a problem. For the last three years, he is finding it difficult to meet his Divisional goal due to 3 out of 10 Marketing Managers reporting him have been underperforming continuously for the last 3 years. Their performance rating is 2 in the scale of 10. Despite repeated counseling, there is no improvement, but they are very fine human beings. They have their own personal problems at home. One Manager has his both the parents in the hospital suffering from Cancer. The second Manager has two wives, with 9 children with a bag of problems at home. The third Manager is very popular in the community around and he is also Municipal Councilor with inevitable demand on his time for his noble social work. Anand, the Vice President, being their boss, is very friendly with them including with members of their family. It is now quite evident that if the 3 continue to underperform, Anand would not be able to move upwards to realize his dream of President and he also will have no choice but to dole out normal increments to them and continue to carry on with the underperformers. His discussion with Vice President-HR reveals that these 3 persons cannot be moved out to other Divisions of the Organization, though the company is a large Multi-Divisional company. Anand is now left with two choices: i) either fire them or ii) carry on with them as he has done in the past three years.

CASE 2:

In this case, Hasmukh, the Vice President marketing (with more or less same background as Anand) with a strong ambition to become the President and then CEO, in a subsidiary of a large multinational FMCG company, currently doing extremely well, faces internal competition within the Organization for his dream of becoming President or CEO in the immediate future. He also knows that young Managers who had been sent abroad to work in group companies returned to India to become the Heads of Divisions. Hasmukh is also deeply in love with a girl and promised to marry her at any cost once he gets well settled in his career. Suddenly, his management informs him that there is vacancy for the position of President in the group company in Vietnam. He also realized that many of his peers are not so keen to be transferred with family to country like Vietnam, though it is an excellent opportunity for the career growth. Hasmukh finds this as a golden opportunity to realize his dream by short cut. His parents are agreeable but his lady love flatly refuses his going to Vietnam and wants him to remain in India and marry. He feels he is still scattered and not set up well for the marriage, but he deeply loves her. Hasmukh has, therefore, 2 choices: i) desert his one and the only lady love and get transferred to Vietnam to realize his dream. ii) the to go by his lady love, remain in India, wait for the promotion or not, but marry his lady love.

What decision Anand takes in Case 1 and what decision Hasmukh would take in Case 2 would prove whether they have Common Man's Ethics or Ethics of an Ambitious Professional Manager. In Case 1, to fire the three underperformers require great moral courage on the part of Anand, a strong belief that he is taking the right decision for his company and for his personal interest of realizing his dream and that it is in the interest of the business entrusted to him, and that it is necessary to take such decision with some degree of self interest. This is exactly the Personal Ethics of a real Professional Manager who is in the success oriented path. If such Professional Manager is so “kind”, he can also show his “kindness “by sharing a part of his salary with the under-performers for some time until they get job elsewhere. Or he can make special efforts to get them job in the industry. This may perhaps soften the blow on the under-performers, because he is a “kind” Professional Manager. Not firing the under performers will indicate the Personal Ethics of a Common Man, without taking care of his own interest, kind, humane and understanding towards the family of the under-performers. The society will perhaps label him as a good man. More or less the same lesson in Case 2 also. If Hasmukh takes tough and painful decision to disagree with his lady love and get transferred to Vietnam, that is exactly the Personal Ethics of an Ambitious Professional Manager demands. He may lose his lady love so dear to him, but he equally loves his dream which dominates his life. He believes that in pursuit of his Goal, dream has a price to pay, if he is really fanatic about his dream. Obviously rejecting an opportunity to reach your dream by rejecting the transfer to Vietnam for the sake of your love is clearly the mark of personal ethics of a common man. Every one, more importantly his lady love calls him as good and considerate man.

Common Man's Personal Ethics is built around his so called GOOD and BAD which what the society considers moral values. How does common man understands moral good in personal life, based on which he builds his personal code to lead his life and to achieve peace and personal satisfaction? Moral good in personal life comprises more of GIVING to society than TAKING, more of taking care of others than yourself and more of sacrificing than causing pain to others. Moral good in personal life is working for social good than for personal good, more for public interest than private interest, becoming more and more selflessness than selfish. In the Ethics Scale, there are two extremes. The utter SELFISHNESS on the left end and total SELFLESSNESS on the right extreme. Ramalimgam Raju, the Promoter & Managing Director of Satyam Computers, responsible for one of the biggest corporate frauds in India, worked at the extreme left (utter selfishness). Mother Theresa worked at the right end of the Ethics scale (total selflessness). In the center of this Ethics scale, there are people who act with SELF INTEREST neither utterly selfish nor totally selfless.

A good common man who has taken moral good as the basis of his code of personal conduct normally works towards selflessness or public good, which may not be necessarily for his personal good or personal interest. At the end of the day, the Manager with Personal Ethics of a Common Man may have sleepless night, if he realizes that his actions during the day were not in keeping up with his concept of moral good built into his personal ethics. For every decision, such Manager always tends to seek approval of his subordinates, bosses and the society, regardless what he decides whether promote his own interest or not. He tends to become extremely sensitive to the feelings of others. All decisions are taken by him on this basis. Ambitious Professional Manager may not succeed with this type of personal ethics in the pursuit of his goal or dream.

Can you - qualified as Professional Manager from the B school, succeed in corporate life to achieve your dream with the sensitivity of Personal Ethics of a Common Man described above? According to me, if you have a dream and want to succeed, your Personal Ethics as a Professional Manager has to be different from that of a Common Man. You may have to review, adjust and calibrate your personal ethics to suit and adjust yourself to walk the difficult path of your dream as Professional Manager for achieving the success. If you fail to calibrate your ethics, pursuit of your dream may result into sleepless nights and clash with what you considered to be moral good. This is bound to shake your self confidence. Remember the Key to success is your SELF CONFIDENCE and your BELIEF IN YOURSELF. Self confidence will be undermined if your ethics does not permit you to be proud of what you have done during the day in pursuit of your dream.

What does this mean? Your ethics should permit during the pursuit of your dream, to act with self interest, though not with selflessness, nor with utter selfishness. You are always first and then, of course others. If you are there, everything else will be there. Charity should begin at home and not in neighbor’s house. Your ethics should be built on this foundation if you want to succeed as a Professional Manager in the tough battle field of business world. In your moral good, GIVING and giving to the society has limitation. It assumes that you had TAKEN before being able to GIVE. As Ambitious Professional Manager, your first duty is to take care of yourself by fair and legitimate process. Working towards ethically built dream of yours is your fundamental duty which should be achieved through fair practices.

Ambitious Professional Manager should clearly define his dream which should be ethical and legitimate. Review your personal ethics carefully and see whether the concept of moral good built into it will clash or come in the way of your pursuit of your dream. If so, calibrate it to remove the conflicts.

In conclusion, Personal Ethics of Ambitious Professional Manager may have to be different from the Personal Ethics of a Common Man, if he wants to realize his dream and to bolster his SELF CONFIDENCE, which is the only key to success.


Prof. Ram Mallar.

© 2012
Mallarr Law Associates LLP
3, Silver Cascade, 110AA, Near Ruby Mills, Senapati Bapat
Marg, Dadar West. Mumbai 400 028.
Tel. No.: 2432 28413 (3 lines)
Email: mlc@mallarlaw.com.
Website: www.mallarlaw.com

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February 18, 2012

SOCIAL BUSINESS 

Prof. Muhammad Yunus, the Nobel Laureate, the father of micro finance, when he was in Mumbai on February 12, spoke about the new concept of SOCIAL BUSINESS or NON DIVIDEND BUSINESS for solving chronic social problems in India. 

What is this SOCIAL BUSINESS? It is a business without profit motive. We have seen in the Corporate Governance that the business of the business is to make profit, without which no business can survive. The profit is the return to the promoters/stakeholders on their investment of time and capital. On the face of it, we find contradiction in social business. We have also seen that Business Ethics is the study of good and bad in the business and that GOOD in the business is to generate profit, though Business Ethics also lays down the guidelines for how to and how much profit and how it should be utilized. Hence there is also a problem in blending Business Ethics with social business. 

Business is basically to make profit, for creation of wealth and for economic development which for increasing the standard of living of people and removal of poverty in country like India. 

The new concept of Social Business propagated by Prof. Yunus has a different connotation. He has also described it as NON DIVIDEND BUSINESS. If you analyze it carefully, this is exactly what we meant as social content in the Business Ethics and Corporate Governance. To some extent, it is a new terminology used for social project or CSR or so many service projects undertaken under good Corporate Governance. 

Social Business also means various philanthropies and charities carried on through many societies registered under Society Registration Act, or Registered Trust or Non-profit Organizations under Section 25 of the Companies Act. All these vehicles are non-profit organizations and many of them are in SOCIAL BUSINESS as meant by the Professor. 

As explained by the Professor, the social business is one that pays no dividend to shareholders, but pursues the social project and ploughs back the resulting profits into the organization for the objects of the organization. The word BUSINESS has been used for such projects to focus that it should pay for itself and should be pursued with same zeal and spirit as normal business is pursued. Social business can be undertaken in a large scale like the Professor has done in Bangladesh with a joint venture with Danone for fortified yogurt for poor and undernourished children in Bangladesh or sale of clean wafer in joint venture with other multinational companies. 

Focus in the social business is public good and not private good as in the normal business. That way all public sector business is social business. But by social business, what we mean is that citizens or corporate citizens in the private sector undertake social projects for alleviation of poverty or meeting the needs of poorer section of the society. This will be pursued efficiently so as to result into profit which will not be distributed as dividend to the stakeholders, but will be used for the object of the project. In fact, this is exactly what has been contemplated under Section 25- company under the Companies Act as non-profit organization. However, Section 25- company is the most appropriate organization for carrying on the social business. 

Social business should not be confused with the BUSINESS in normal sense. The real meaning of business is buying and selling for profit. It is the element of profit that drives the business to success and it is the foundation of private enterprise. You are all doing your MBA to become robust, tough, strong and vibrant Professional Managers of real business and not necessarily the social business which is not driven by profit motive. Remember the business of the business is maximization of profit through fair trade practices for promotion or protection of multiple stakeholders. Also remember, the society is also equally important stakeholders. Any company which follows the good Corporate Governance is also doing social service to the extent it has included the society as one of its important stakeholders. The question is whether it promotes or just protects the interest of the society as a stakeholder. If the company is deeply engaged in promotion and not just protection of the society as its stakeholder, then it may amounts to a social business. 

For a social business, ultimate test is how much public good or social good as against private good has been built into your Corporate Governance. 


Prof. Ram Mallar.

© 2012
Mallarr Law Associates LLP
3, Silver Cascade, 110AA, Near Ruby Mills, Senapati Bapat
Marg, Dadar West. Mumbai 400 028.
Tel. No.: 2432 28413 (3 lines)
Email: mlc@mallarlaw.com.


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Interdependence of
PERSONAL ETHICS, BUSINESS ETHICS
 and CORPORATE GOVERNANCE.


These are different and independent concepts, but they are interdependent at the same time.

Corporate Governance is methods and practices by which the business is organized, directed, controlled and carried on in a corporate form of Business Organization by the Board of Directors for achieving the mission of the corporation. Business Ethics is a code of conduct for carrying on business framed by the promoters, based on what they consider “good” and “bad”, just and unjust, fair and unfair for and in the BUSINESS. Whereas Personal Ethics is the code of conduct for a person framed on what he considers “good” and “bad”, right and wrong, fair and unfair, just and unjust in his personal life which gives him the guidelines for carrying on his day to day life.

Interdependence of these concepts are visible. Corporate Governance is an operational frame work for carrying on the business by the businessman/promoters, while Business Ethics is the philosophical content/justification, for the Corporate Governance, which in a way provides moral substance to the business he carries on. It is, therefore, not strange that any Business Ethics of any business house necessarily has the flavor and the influence of the Personal Ethics of the promoters. You can always see the subtitle distinction in the organizational cultures of Tatas, Reliance, Infosys or Birlas. Business Ethics could be different based on personal ethics of the owners/promoters of the business, which is inevitable, however hard you may try to professionalize the management.

Every Promoter must understand that Personal Ethics and Business Ethics are different concepts. Don't go by the common noun “ETHICS”. If the promoter introduces his Personal Ethics into his business by this confusion, he will ruin the business, as Ramalingam Raju did, in Satyam Computers in 2008/09 or what happened in Enron of USA in 2001. What is “good” in personal life of the promoters need not be always “good” for his business.

No doubt both in Personal Ethics and Business Ethics, it is this study of “GOOD” and “BAD”. But one is in personal life and another is in business life, both are different human endeavors, contours are different and more importantly, objectives are different. Personal Ethics deals with what is “good” in personal life which is basically moral good as defined by the society you live in. The underlying emphasis of the moral good is one of GIVING and not of TAKING from the society, more on  the public good, or for the mankind. In a way, the objective of the Personal Ethics or  in personal life of a common man, is seeking a label of GOOD MAN in the society.

But Business Ethics deals with what is “GOOD” and “BAD” in and for the business.
While studying Business Ethics, we should not forget that the ultimate “GOOD” in the business is to make PROFIT which cannot be the meaning of “GOOD” in Personal Ethics. Critical and narrow meaning of PROFIT is using the society for enriching oneself, as profit is an excess of price charged to customers over the cost of production and one has a choice not to charge this excess, if he does not want to make profit.

Hence meaning of what is “GOOD” is different in Business Ethics and Personal Ethics. If we lose sight of this, we will confuse the personal and business life and perhaps ruin the business or the personal life.

There is no justification for BUSINESS to exist unless it believes in making profit. The business of the business is to make profit, otherwise it ceases to be business, may be an NGO.

What does the Business Ethics means to the public? Object of the Business Ethics is to tell the business man how to make profit, how much to make and more importantly, how it should be utilized, but the profit, the business should make, there cannot be any doubt if you want to be in the business. Profit does not mean profiteering which involves looting the market, exploiting the consumers or resorting to anti-competitive practices or unfair trade practices. Maximization of profit is the keyword in Business Ethics, which the business should earn by optimization of factors of production or lowering cost of production or adding value/quality to consumers. Basically Business Ethics deals with method of making profit and its utilization which could be different in traditional and modern Business Ethics.

While the dominant objective of the Business Ethics is for maximization of profit and how it should be utilized and not for profiteering. What does this mean? Business Ethics, therefore, should have a social content built into it or at least should have the sobering effect of public good as against the private good only. The popular CSR (Corporate Social Responsibility) flows from this sense of the Business Ethics.

If “GOOD” in the Business Ethics includes a social content or public good, this can only come from the Personal Ethics of the person who controls or manages the business, that is promoter, who ultimately organizes, controls and directs the business through the Board of Directors. Hence quality of personal ethics of the promoter is important. If he is utterly selfish, he will ruin the business and if he is totally selfless, then also he will defeat the business, as the business without making profit cannot last long.

Hence you note the interdependence of Corporate Governance, Business Ethics and Personal Ethics.


Prof. Ram Mallar.

© 2012
Mallarr Law Associates LLP
3, Silver Cascade, 110AA, Near Ruby Mills, Senapati Bapat
Marg, Dadar West. Mumbai 400 028.
Tel. No.: 2432 28413 (3 lines)
Email: mlc@mallarlaw.com

4 comments:

  1. Very clear views on personal ethics of a comman man and a professional manager. Good clarity of thought.

    Thanks for the article.

    ...BR

    ReplyDelete
  2. Sir,

    It was an honour to have learned from you.
    However I feel such an important subject should be taken earlier in the MBA curriculum as this knowledge is the base for us to become future CEO/CFO etc.
    Also I look forward to seeing your notes in a comprehensive book so that all management students and professionals alike can benefit from you.

    Your student,
    Gaurav P.Mashalkar
    JBIMS Batch of 2013

    ReplyDelete
  3. Thank you Sir for your valuable insights.
    Can you please upload last lecture PPT @JBIMS here.

    ReplyDelete