Whether LAWS, RULES and CODES are substitute for Ethics?

Whether LAWS, RULES and CODES are substitute for Ethics?


Mar 30


Posted by: CS Shilpi Thapar

 Corporate Governance as per Cadbury Report, 1992 is the system by which companies are directed and controlled. As per KMPG Report-2009, good corporate governance is characterized by firm commitment and adoption of ethical practices by an organisation across its entire value chain and in all of its dealings with a wide group of stakeholders encompassing employees, customers, vendors, regulators and shareholders(including minority shareholders) in both good and bad times. Clause 49 of the Listing Agreement has prescribed best practices to be followed by listed companies in case of board of directors, audit committee, remuneration of directors, board procedures, management, shareholders report on corporate governance and compliance. The main aim of corporate governance is promoting fairness, transparency and accountability of companies, developing effective structure which specifies the distribution of rights and responsibilities among different participant in the company i.e Board, CEO, Manager, Shareholders and Stakeholders and spells out the rules and procedures for making decisions in corporate affairs.

Generally corporate governance is a misunderstood term and normally confined only to Corporate Management. But it is much broader and extended to administration of State and Central Governments. There needs to be fair, efficient and transparent administration and companies should strive to meet their defined mission effectively.

Government and Regulators are striving hard to introduce  latest and amended laws, codes and regulations at all levels to bring effective corporate governance but most important questions arises that Whether these Laws, Rules and Codes are substitute to Ethics? Whether just by implementing stringent laws, codes and regulations, the most important objective of having effective corporate governance practices at all levels can be achieved and fulfilled?

Ethical culture is a big part of corporate governance. Strong Ethical commitment is a great business. Laws are about what is lawful and unlawful. Laws are sets of standard principles that a business must follow to remain “legal “in eyes of law.

Corporate Governance without Ethical Governance in any business is a failure as corporate governance is guided only by several laws and regulations and ethical governance is guided by self regulated moral standards. Ethical governance is most important as it is related to human values and virtues. Existence of Corporate governance does not at all guarantees that everything is ethically governed.

 In spite of proper corporate governance structure and legal compliances, many frauds, scams and malpractices are committed by companies in form of Window dressing their accounts, Cashless revenue and nonexistent revenues, accelerated revenue recognition, margin Management, inflated Balance Sheet, cash flow management and sugar coated accounts.

This shows that accounting regulation is not sufficient and fool proof. Laws and codes/rules are enacted by the governments, but ethics absolutely regulates areas and details of behaviour that lie beyond government control. Ethics in business means that business should be conducted according to certain self recognised moral standards. Legal governance is primarily concerned with conduct whereas ethical governance talks about what we are and not just what we do. Law is jurisdictionally limited and thus legal governance may vary in one state/country from another, whereas ethical values and governance are inclined to be more universal.

Many companies have implemented best corporate governance practices in their system but failed to implement ethical governance for eg. Satyam –Indian Enron. It followed all laws and codes, received awards for following Best Corporate Governance Practices but failed in following ethics by falsification of accounts, misrepresenting the facts in the annual report and cheating its investors and stakeholders. It’s the high profile case of corporate greed and misconduct. Ethics is the virtue or exclusive human quality that cannot be formed, managed and controlled by means of standards, rules or regulations.

Ethics cannot be thought, it has imbibed. It should be adopted in mind and heart. It has more to do with “Being Good” than “Knowing Good”. It has to be deeply infused in business practices i.e leadership, core systems, decision making processes, etc.

Regulatory Authorities are also making efforts to implement Ethical Governance along with Corporate Governance i.e by introducing clause 49 of Listing Agreement, Companies Auditors Report Order (CARO) 2003 amended in 2004, SEBI (Issue of Capital & Disclosure requirements) Regulations 2010. In Companies Act, 2013, there are certain provisions laying more importance on Ethical Governance i.e Introduction of mandatory spending by prescribed class of companies on CSR activities, introduction of appointment of women director on the board in order to combat the discrimination in work places. Government has also implemented the Ethical Governance by introducing the system of Social Audits for its Schemes and Projects.

As per as National Voluntary Guidelines on Social, Environmental and Economic Responsibilities of Business” issued by Ministry of Corporate Affairs(MCA) in 2011, certain principles was introduced which aims for implementing Ethical Governance:

1.  Business should conduct and govern themselves with Ethics, Transparency and Accountability

2. Business should provide goods and services that are safe and contribute to sustainability through their life cycle.

3.   Business should promote the well being of all employees.

4. Business should respect the interest of and be responsive towards all stakeholders, especially those who are disadvantages, vulnerable and marginalized.

5.  Business should respect and promote human rights.

6.  Business should respect, protect and make efforts to restore the environment

7.  Business, when engaged in influencing public and regulatory policy, should do so in a responsible manner.

8.  Business should support inclusive growth and equitable development

9.  Business should engage with and provide value to their customers and consumers in a responsible manner.

Professionals like Chartered Accountants, Company Secretaries, Cost Accountants and legal advisors have vast role to play for implementing Ethical Governance in organisations.  We have observed that professional negligence of highly paid professionals was responsible for scandals, scams like Enron, World com, Satyam Computers which impacted lives of numerous people and shook the economy and financial market. We should re-position ourselves as committed professional and work with ethics.

We should advise our corporate clients to implement Ethical Governance along with Corporate Governance by adopting following methods:

  1. Framing of Code of Ethics, the Crime and Fraud Prevention Policy and it should be displayed all over the company premises.
  2.  Forming ethics committee to look after the need of ethical values
  3. To conduct seminars, workshops and audio visual displays to be arrange periodically to educate employees in ethical value and culture and to create ethical organisation culture.
  4.  To insist on appointing ombudsman to investigate decisions from ethical and moral point of view.
  5.  To insist on conducting annually social audit by inside executives or by outsiders to know improvement areas.
  6.  To Conduct Professional training’s on Ethical Governance.
  7. There has to be “Tone from the Top”. So Ethical Governance should be part of organisation culture and it should from the top i.e Board of Directors who is the leaders of the organisation.  A board is responsible for determining, articulating and communicating the values and standards of the business, and for ensuring that the policies, procedures and controls in place act to embed, rather than hinder, ethical values throughout the business.
  8.  There should be correlation between the existence of an ethics and compliance programme in the company with its brand, reputation, ethics culture, corporate governance and social responsibility.

 To conclude, no Laws or Codes, Rules can substitute Ethics. To be a long term successful company, it should have an effective and balanced mix of ethics and compliance programme, reputation, leadership and innovations, corporate governance, corporate social responsibility and a culture of ethics.

The Companies which run their business by implementing Ethical Governance along with Corporate Governance are far more sustainable and able to gain the trust of its shareholders, stakeholders, regulatory authorities and create value to the society at large. So all laws, rules and regulations should give more emphasis on Ethical Governance along with Corporate Governance. You can have Ethical Governance in any company without Corporate Governance but not vice versa.

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