Mb321 - April 07

Question Paper Business Ethics & Corporate Governance (MB321) : April 2007 Section A : Basic Concepts (30 Marks) • • • •

1.

This section consists of questions with serial number 1 - 30. Answer all questions. Each question carries one mark. Maximum time for answering Section A is 30 Minutes.

A legal company conducts its business with the help of representatives selected by shareholders who are referred to as ‘directors’. A person with which of the following disqualification/s cannot be appointed as a director?

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I. If he is insolvent. II. If he does not have good interpersonal skills. III. If he has been convicted by court for moral turpitude. (a) (b) (c) (d) (e) 2.

Changes in strategies bring change in ownership. Which of the following activities, resulting from change in ownership, involves swapping debt for common stock, which increases leverage, or swapping common stock for debt, which decreases leverage? (a) (b) (c) (d) (e)

3.

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It necessitates that rules must apply equally to all prospects under consideration for hiring or promotion. Reverse discrimination ensures equality of opportunity. It necessitates that no applicant must be rejected for reasons other than those laid down by rules for hiring. It specifies how rules for hiring should be applied and also determines the results of applying the rules. Only (III) above Only (IV) above Both (I) and (III) above Both (II) and (IV) above

(II), (III) and (IV) above.

Businesses can succeed if they maintain good relationships with their stakeholders. Who among the following, as per Freeman and Reed, could be stakeholders of an organization? I. Any group of people who have a stake in the organization. II. Those who are vital to the survival and success of the organization. III. Any group that is affected by the activities of the organization. (a) (b) (c) (d) (e)

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Exchange offer Share repurchase Going private Leveraged buy-out Corporate raiding.

An important principle of ethical selection is equality of opportunity. Which of the following statements is/are not true with respect to ‘equality of opportunity’? I. II. III. IV. (a) (b) (c) (d) (e)

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Only (I) above Only (II) above Only (III) above Both (I) and (III) above All, (I), (II) and (III) above.

Only (I) above Only (II) above Only (III) above Both (I) and (III) above All (I), (II) and (III) above.

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5.

Businesses that are responsible to their customers strive to treat them fairly and honestly by

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I. Honoring warranties. II. Meeting delivery commitments. III. Charging fair prices. (a) (b) (c) (d) (e) 6.

Only (I) above Only (II) above Only (III) above Both (I) and (III) above All (I), (II) and (III) above.

Which of the following theories judge/s the ethical nature of an organization based on the 'espoused values' and 'values in practice'?

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I. Theory of corporate moral excellence. II. Ethics and stakeholders theory. III. Ethics and corporate governance. (a) (b) (c) (d) (e) 7.

Only (I) above Only (II) above Only (III) above

Both (I) and (II) above All (I), (II) and (III) above.

Various views about the relationship between ethics and business have been expressed. Which of the following statements is/are true about the ‘Unitarian view’ of ethics?

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I. Business is a part of moral structure and moral ethics. II. Business plays a key role in serving the society and bringing about societal welfare. III. Ethical behavior and business should be combined in a new area called business ethics. (a) (b) (c) (d) (e) 8.

Corporations operating at which level of ethical consciousness, are driven by the philosophy “might makes right”? (a) (b) (c) (d) (e)

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Only (I) above Only (II) above Only (III) above Both (I) and (II) above All (I), (II) and (III) above. < Answer >

Law of jungle Stakeholder concept Corporate citizenship Profit-maximization in the short-term Profit-maximization in the long-term.

Ethical theories are commonly divided into three subject areas, one of which is normative ethics. Which of the following statements is/are true about normative ethics? I. It deals with specific, often controversial moral issues such as abortion, female feticide and infanticide etc. II. It deals with linguistic issues that are concerned with the meaning of key moral terms used. III. The golden rule “do unto others as you would want them do unto you” is an example of normative ethics. (a) Only (I) above (b) Only (II) above (c) Only (III) above (d) Both (I) and (III) above (e) All (I), (II) and (III) above.

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10. Focus on corporate responsibility was highlighted through the industrial revolution and the years thereafter. Which of the following happenings pertain/s to the ‘nonconformist challenge’ in Britain?

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I.

Wealth and industry were approached in different ways from the perspective of the religion that people heading big businesses followed. II. Quakers played an important role in shaping values of new entrepreneurial groups. III. It reflected the needs of people who failed to prosper from the industrial revolution. (a) (b) (c) (d) (e)

Only (I) above Only (II) above Only (III) above Both (I) and (II) above All (I), (II) and (III) above.

11. Which of the following is/are theories of corporate governance?

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I. McGregor’s Theory X and Theory Y. II. Stewardship Theory. III. Agency Theory. (a) (b) (c) (d) (e)

Only (I) above Only (II) above Only (III) above Both (I) and (II) above All, (I), (II) and (III) above.

12. Four characteristics of corporations attract investors. Which of the following statements is/are true about ‘limited liability’ of an organization?

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I. It implies that the corporation is distinct from its owners and employees. II. Risk of loss is limited to the amount invested. III. If corporations are to become bankrupt, members of the corporation are held liable individually. (a) (b) (c) (d) (e)

Only (II) above Only (III) above Both (I) and (II) above Both (I) and (III) above All, (I), (II) and (III)s above.

13. From the following identify the anti-takeover technique, where the management threatens that in the event of a takeover, the entire management team will resign. (a) (b) (c) (d) (e)

Poison pills People pill Sandbag Green mail Golden parachute.

14. Many a times work circumstances encourage unethical practices. Which of the following can be work place characteristics that make the management prone to fraud? I. II. III. IV. (a) (b) (c) (d) (e)

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Major performance-related compensation. High degree of innovation and progress. Excessive monitoring of significant controls. Unduly aggressive financial targets. Only (IV) above Both (I) and (IV) above Both (II) and (III) above (I), (II) and (IV) above. (I), (III) and (IV) above.

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15. Which of the following is/are unethical practice/s Multinational Corporations (MNCs) are accused of adopting in the area of personnel management? I. II. III. IV. (a) (b) (c) (d) (e)

Exploiting low-paid foreign workers. Circumventing home country laws on business competition, labor relations etc. Encouraging ‘brain drain’ from poorer countries. Not respecting human rights. Only (I) above Both (I) and (II) above Both (III) and (IV) above (II), (III) and (IV) above. All (I), (II), (III) and (IV) above.

16. The anthropocentrism approach is (a) (b) (c) (d) (e)

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A moral responsibility to preserve the environment A moral responsibility to protect animals A radical approach to environmental responsibility An attempt to frame green policies to curb disasters A program for the eradication of illiteracy.

17. Formulation of law involves individual, group, social and political processes. But, problems arise during the transformation of individual moral standards to universal legal requirements at each stage of the political and social process. Which of the following is/are these problems?

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I. Lack of accurate information makes it difficult to form appropriate laws. II. Moral standards of members of society are misrepresented as consensus of large organizations. III. Moral standards are strengthened by the formation of small groups that emerge on the basis of beliefs, values and norms that are widely accepted. IV. Legal requirements formulated by political processes are often incomplete and imprecise. (a) (b) (c) (d) (e)

Only (IV) above Both (I) and (III) above Both (II) and (III) above (I), (II) and (IV) above All (I), (II), (III) and (IV) above.

18. The objective that ‘nothing will be produced until it is needed’ is applicable to the concept of (a) (b) (c) (d) (e)

Procurement Forward buying Just-in-time delivery Total quality management Piling up of stocks.

19. The two-tier board of an organization is particularly useful in which of the following activities? (a) (b) (c) (d) (e)

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In ensuring that there is a counterbalance to the power of managers For managers to assert their power In improving operational efficiency In ensuring that employees can determine strategies for the organization In improving marketing efficiency.

20. Which of the following committees is usually set up to select new non-executive directors? (a) (b) (c) (d) (e)

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Audit committee Nomination committee Remuneration committee Steering committee Ethics committee.

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21. To avoid ethical dilemmas managers can follow the approaches by Clutterbuck, and Drummond and Carmichael. Which of the following is included in Drummond and Carmichael’s approach? (a) (b) (c) (d) (e)

Acknowledge the personal dimension to ethical behavior It is an institutional and control oriented approach Publish a code of ethics Include ethics in recruitment criteria Reinforce policies through training and development.

22. Which of the following is not an issue addressed by recommendations of the Cadbury Committee on financial aspects of corporate governance? (a) (b) (c) (d) (e)

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Drug and alcohol abuse Industrial espionage Discrimination Amiable rapport with government officials Misuse of proprietary information.

24. Which of the following could be the main dilemma a multinational company faces when it undertakes serving foreign markets? (a) (b) (c) (d) (e)

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Differences in ethical beliefs and values in the home country and the host country Balancing the company’s own economic interest with the interests of the host country Differences in legal controls Issues of transfer pricing Issues of CEO’s remuneration.

25. Quality control issues pose ethical dilemmas for operations managers. It is important for managers to ensure quality management because I. It is essential in order to expand an organization’s market and introduce new product lines. II. It involves complex decision making. III. Companies can lose loyal customers in the long run if quality aspects that go unnoticed not taken care of. IV. Not ensuring quality can tarnish the image of the organization. (a) Only (III) above (b) Both (I) and (II) above (c) Both (III) and (IV) above (d) (I), (II) and (III) above (e) (I), (III) and (IV) above.

Evaluating the decision Judging the decision Establishing a moral intent Engaging in ethical behavior Problem recognition.

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by customers are

26. The four step ethical decision making model serves as a guideline for managers in making decisions. Which of the stages involves identifying stakeholders who will be affected by the decision? (a) (b) (c) (d) (e)

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Vesting of decision making power Term of directors Management of pension funds Rights of shareholders Professional and objective relationship between board and executives.

23. Which of the following is not an unethical practice at the work place? (a) (b) (c) (d) (e)

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27. Which of the following is/are the main elements of the ‘integrative social contract theory’ by Donaldson and Dunfee? I. II. III. IV. (a) (b) (c) (d) (e)

Hypernorms. Knowledge contract. Psychological contract. Micro social contract. Only (I) above Only (II) above Both (I) and (IV) above Both (II) and (III) above (II), (III) and (IV) above. < Answer >

28. Which of the following issues are not addressed by ‘corporate governance’? (a) (b) (c) (d) (e)

Ethical issues Efficiency issues Accountability issues Social issues Transparency issues.

29. Which of the following statements is not true about the Indian Information Technology Act, 2000? (a) (b) (c) (d) (e)

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It proposes legal framework for authentication of electronic records/communications It has validated digital signatures It defines hacking It has set up a cyber appellate tribunal Acceptance in electronic form of any offer, culminating in any contract has been declared illegal.

30. According to the enlightenment matrix, a company that reflects low self-interest and low philanthropy is involved in (a) (b) (c) (d) (e)

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Pure philanthropy Social responsibility Cause-related marketing Enlightened self-interest Utilitarianism. END OF SECTION A

Section B : Caselets (50 Marks) Caselet 1 Read the caselet carefully and answer the following questions: 1.

Several concepts are relevant when understanding ethics. Explain how the concepts of (i) ethical relativism, (ii) ethical subjectivism and (iii) consequentialisim, are applicable in comprehending ethics.

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(4 + 3 + 2 = 9 marks) 2.

Can ethical relativism be universally accepted? Analyze.

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(8 marks) Cultures differ widely in their moral practices. Some anthropologists say that diversity is evident even on those matters of morality where we would expect to agree. We might suppose that in the matter of taking life all peoples would agree on condemnation. On the contrary, in the matter of homicide, it may be held that one kills by custom his two children, or that a husband has a right of life and death over his wife or that it is the duty of the child to kill his parents before they are old. It may be the case that those are killed who steal fowl, or who cut their upper teeth first, or who are born on Wednesday. Among some peoples, a person suffers torment at having caused an accidental death, among others it is a matter of no consequence. Suicide may also be a light matter, the recourse of anyone who has suffered some slight rebuff, an act that constantly occurs in a tribe. It may be the highest and noblest act a wise man can perform. The very tale of it, on the other hand, may be a matter for incredulous mirth, and the act itself, impossible to conceive as human possibility. Or it may be a crime punishable by law, or regarded as a sin against the gods.

Anthropologists point to a range of practices considered morally acceptable in some societies but condemned in others, including infanticide, genocide, polygamy, racism, sexism, and torture. Such differences may lead us to question whether there are any universal moral principles or whether morality is merely a matter of “cultural taste”. Differences in moral practices across cultures raise an important issue in ethics - the concept of “ethical relativism.” Most ethicists reject the theory of ethical relativism. Some claim that while the moral practices of societies may differ, the fundamental moral principles underlying these practices do not. For example, in some societies, killing one's parents after they reached a certain age was common practice, stemming from the belief that people were better off in the afterlife if they entered it while still physically active and vigorous. While such a practice would be condemned in our society, we would agree with these societies on the underlying moral principle -- the duty to care for parents. Societies, then, may differ in their application of fundamental moral principles but agree on the principles. Also, it is argued, it may be the case that some moral beliefs are culturally relative whereas others are not. Certain practices, such as customs regarding dress and decency, may depend on local custom whereas other practices, such as slavery, torture, or political repression, may be governed by universal moral standards and judged wrong despite the many other differences that exist among cultures. Simply because some practices are relative does not mean that all practices are relative. Other philosophers criticize ethical relativism because of its implications for individual moral beliefs. These philosophers assert that if the rightness or wrongness of an action depends on a society's norms, then it follows that one must obey the norms of one's society and to diverge from those norms is to act immorally. This means that if I am a member of a society that believes that racial or sexist practices are morally permissible, then I must accept those practices as morally right. But such a view promotes social conformity and leaves no room for moral reform or improvement in a society. Furthermore, members of the same society may hold different views on practices. In the United States, for example, a variety of moral opinions exists on matters ranging from animal experimentation to abortion. What constitutes right action when social consensus is lacking? Perhaps the strongest argument against ethical relativism comes from those who assert that universal moral standards can exist even if some moral practices and beliefs vary among cultures. In other words, we can acknowledge cultural differences in moral practices and beliefs and still hold that some of these practices and beliefs are morally wrong. The practice of slavery in pre-Civil war U.S. society or the practice of apartheid in South Africa is wrong despite the beliefs of those societies. The treatment of the Jews in Nazi society is morally reprehensible regardless of the moral beliefs of Nazi society. For these philosophers, ethics is an inquiry into right and wrong through a critical examination of the reasons underlying practices and beliefs. As a theory for justifying moral practices and beliefs, ethical relativism fails to recognize that some societies have better reasons for holding their views than others. But even if the theory of ethical relativism is rejected, it must be acknowledged that the concept raises important issues. Ethical relativism reminds us that different societies have different moral beliefs and that our beliefs are deeply influenced by culture. It also encourages us to explore the reasons underlying beliefs that differ from our own, while challenging us to examine our reasons for the beliefs and values we hold.

Caselet 2 Read the caselet carefully and answer the following questions: 3.

Discuss how companies that adopt and enforce a code of conduct can yield practical business benefits.

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(8 marks) 4.

What are corporate codes and what is their importance for companies? What are the various formats in which a corporate code can be developed?

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(9 marks) Written codes of conduct have a long history in the business community, usually taking the form of a statement or set of rules guiding ethical business practices. A significant evolution occurred in 1991 with the development of the first code of conduct on labor practices in suppliers, the independent business partners that supply a brand name company with products or services. This pivotal event introduced a landmark concept, that private companies should ensure consistent application of human rights norms to workers no matter where they do business and no matter whether they directly own the operation or not. Workplace codes of conduct, begun over a decade ago and now used by hundreds of multinational companies, arose from an awareness of the poor working conditions that exist in manufacturing. Over the last decade, awareness has spread to a worldwide audience and there is no longer a question about whether an organization should adopt a code, but instead, the question is which standard to adopt and how to best apply it. Codes of conduct typically set guidelines on issues including child labor, forced labor, working hours, discrimination, freedom of association, and health and safety. They sometimes incorporate policies on environmental practices or security in shipping. The field of code of conduct compliance has grown steadily and today there is a full array of audit services, information

management tools, and training resources available to companies that wish to better manage supply chain relationships. Companies can gain practical benefits by enforcing a code of conduct. The reputation of a company and its brands is a valuable asset that requires protection. More now than ever, consumers are examining and judging whether corporate practices are ethical. This includes practices of suppliers, whether wholly owned or independent, that are part of the value chain that provides profit to the brand. As trust in the private sector plummets, evidenced by a 2002 Gallup poll of 46 countries in which national legislatures and companies were the institutions least trusted by society, consumers are asking companies to demonstrate that working conditions are safe and fair, particularly in developing countries. Codes of conduct are typically based upon compliance with local law and are also associated with international norms such as the International Labor Organization (ILO) covenants. When they are applied consistently and universally codes may help protect brand reputation by aligning business partner behavior with accepted norms. Experienced brands suggest that their best business partners have reliable delivery times and dependable quality – and manage code compliance well. The management and communication systems that enhance productivity and quality also enhance workplace conditions and give factory management the information they need to build a successful business. It is increasingly common to hear that code of conduct programs have helped businesses simultaneously improve areas such as quality and efficiency and build greater trust with the buyer as a result. Codes are designed for universal implementation. In locations of lax legal enforcement, this is challenging, but still useful for identifying desirable, committed, and forward-thinking business partners. Good labor standards may reduce the risk of future liability, in case laws are enforced or governments launch campaigns targeting industry. Workers themselves may seek redress for legal violations, as in the case of workers in the Northern Mariana islands who formed a class action lawsuit against several USbased brands and retailers. Implementing a code of conduct may prepare a company to respond to an unexpected crisis. Codes may provide staff with guidelines on making appropriate decisions thereby avoiding risk and communicating values to business partners. Developing a code can provide a company with an awareness of issues that may arise and provides staff with relevant experiences to help guide its actions if something unexpected does occur. Most importantly, should negative publicity occur, having a code and relevant experience with the issues allows a company to refrain from taking a defensive posture, or offering an unsatisfactory reaction; instead, the company may respond in a principled, flexible, and proactive manner to address the core issues.

Caselet 3 Read the caselet carefully and answer the following questions: 5.

There is a growing pressure on large-scale companies to deliver and demonstrate that they are delivering societal value. In this light, discuss the importance of external stakeholders for an organization.

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(9 marks) 6.

What are the reasons for the increasing focus on cause related marketing? Elucidate.

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(7 marks) There is a strong, cross-industry consensus on the major challenges facing modern business leaders, such as developing and nurturing core values and core competencies; living with unprecedented complexity; and committing to continuous improvement in all aspects of corporate life. There is a growing pressure on large-scale companies to deliver and demonstrate that they are delivering, both shareholder value and societal value. The vision for creating both shareholder value and societal value rests on the fundamental premise that though profit is essential to run a business, the role of business in the society is to create or add value by designing such processes that help both the organization and the community to develop its capacities. The approach, therefore, does not challenge the role of the business, but it does challenge the way we think about, measure and manage that role and the different types of values it creates. Companies have to make decisions in a more demanding context than ever before, both in terms of competitive pressures and societal expectations. One of the growing leadership concern in particular which has been resonating across major industrial sectors today is `how to bridge competitiveness and social cohesion’. This concern has highlighted the importance of the community as a stakeholder in business activities. In order to create an enabling environment for running good business, business is today compelled to contribute towards the developmental aspects of the society. One of the ways in which business has started combining both social and commercial goals is by emphasizing on `cause related marketing techniques’. Cause related marketing (CRM) is an additional tool for addressing the social issues of the day through providing resources and funding whilst at the same time addressing business marketing objectives. This exciting concept is already gaining wide acceptance with major businesses, charities and causes. CRM has enormous potential to make a significant difference. Luxury hotels were the

first to opt for this strategy by adopting eco-friendly techniques to attract customers and adhere to stipulated regulations. In fact, Mumbai’s Orchid Hotel’s unique selling point is its high degree of eco-consciousness. Customers of these hotels feel that by using eco-friendly measures they too are involved in fulfilling social obligations. Various airlines have partnerships with various NGOs, which support social causes. The reason for this association is to enable the carriers to form a caring airline image in the minds of the consumer in which they would like to be associated. Companies admit that the Indian consumer is more easily convinced by the goodness of the causes. Companies, which have been engaged in supporting social causes, feel that Indians are emotional and goodwill created in such exercises is an invaluable asset for companies. The goodwill created might not immediately translate into sales but it is there for you when you might need it the most. The credit card industry has been able to activate the CRM strategy to a large extent. Citibank, for instance, has tied up with the WWF, the Indian Army and a women’s organization. Since the credit card contributes a part to the NGO it provides emotional benefits to the user (the feel-good factor leads to a sense of contributing to society and so on). To the issuer, they guarantee a higher uptake usage and a lower attrition rate due to strong brand preference and increased customer loyalty. Analysts predict that due to these manifold advantages, around 50 percent of all cards will be affinity or co-branded in the near future. Procter & Gamble Hygiene and Health Care India had launched Project Drishti -- the first ever sight restoration corporate project, which was undertaken in association with the National Association for the Blind (NAB). Project Drishti attempted to restore the sight of over 250 blind girls all over the country through corneal transplant operations. In association with Unicef, it has announced the launch of ‘Open Minds’ -- special programs meant to support and educate working children. These initiatives are supported by their brands. Part of the sale of their specific brand is contributed towards these initiatives. By involving customers in social causes, corporates are perhaps cueing into the customers’ mental process that they need to do something for the community. Market analyst feel that a social attribute added to the brand can boost sales. Though the potential for CRM is currently underestimated, the research study undertaken by the students of NMIMS shows that when price and quality are equal, a partnership between a business and a charity or cause can strongly influence purchasers. A total of 72.3% of consumers agree that when price and quality are equal, they are more likely to buy a brand associated with a cause. For this, they would switch from one brand to another if the brand were going to support a social cause. A total of 57% agreed that they would change the retail outlet they patronized for the same reason. A total of 83.4% of consumers agree that they have a more positive image of a company if they see it is doing something to make the world a better place. END OF SECTION B

Section C : Applied Theory (20 Marks) 7.

Lorex Ltd. wants to conduct an ethical audit to check whether the company’s actions are directed at maximizing long-term owner value and the extent of distributive justice. What should be the objectives of an ethical audit for Lorex? Explain.

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(10 marks) 8.

A World Bank report recognizes the complexity of the very concept of corporate governance and therefore focuses on the principles on which it is based. What are the differences between corporate governance and corporate management? Also explain the various models of corporate governance.

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(10 marks) END OF SECTION C END OF QUESTION PAPER

Suggested Answers Business Ethics & Corporate Governance (MB321) : April 2007 Section A : Basic Concepts 1.

Answer : (d) Reason: A person cannot be appointed as a director if he has the following disqualification: I. If he insolvent. III. If he has been convicted by court for moral turpitude.

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Answer : (a) Reason: An exchange offer involves swapping/exchanging debt for common stock, which increases leverage, or swapping/exchanging common stock for debt, which decreases leverage. Answer : (d) Reason: Statements (II) is not true with respect to equality of opportunity reverse disrimination refers to a situation where a hiring practice is designed to function on the basis of quotas or reservations aimed at providing opportunities for candidates from backward communities. Statements (IV) is not true because equality of opportunity because specifies how rules for hiring should be applied but does not determine the results of applying the rules. Thus equality of opportunity is concerned with screening every aplicant by the same criteria. Statement (I) and (III) are true with respect to equality of opportunity. Answer : (e) Reason: As per Freeman and Reed, the stakeholders of an organization could be I. Any group of people who have a stake in the organization. II. Those who are vital to the survival and success of the organization. III. Any group that is affected by the activities of the organization.

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Answer: Reason:

(e) Businesses that are responsible to their customers strive to treat them fairly and honestly by I. Honoring warrantees II. Meeting delivery commitments III. Charging fair prices Answer: (a) Reason: The theory of corporate moral excellence focuses on two aspects: Corporate culture and Ethical behavior. Analysts believe that an organization culture has an impact on the behavior of its employees. Culture is based on the values of an organization. According to Deal and Kennedy, “Values produce a sense of direction for employees and help to guide and control their day-to-day behavior”. Corporate values can be classified as: Espoused Values, Values in Practice. Answer : (d) Reason: The following statements are true about the ‘Unitarian view’ of ethics: I. Business is a part of moral structure and moral ethics. II. Business has a major role to play in serving the society and bringing about societal welfare. Statement (III) – Ethical behavior and business should be combined in a new area called business ethics – pertains to the integration view of ethics. Hence, option (d) is the answer.

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Answer: (a) Reason: Corporations operating at the law of jungle stage of ethical consciousness are run on brute strength and believe in “might makes right”.

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Answer: Reason:

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(c) Statements (III) - the golden rule “do unto others as you would want them do unto you” is an example of normative ethics is true about normative ethics. Statement (I) is not true as applied ethics deals with specific, often controversial moral issues such as abortion, female feticide and infanticide etc Statement (II) is not true as meta ethics deal with linguistic issues that concern the meaning to key moral terms used.

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Answer : (d) Reason: During the Victorian rule there was a variance in the practice of christianity especially between catholicism of the Irish migrants and the determined quakerism. These quakers constituted the nonconformist section of the society. Noncoformism was with respect to religion. Therefore, the following happenings pertain to the ‘nonconformist challenge’ in Britain: I. Wealth and industry were approached in different ways from the perspective of the religion that people heading big businesses followed. II. Quakers played an important role in shaping values of new entrepreneurial groups. Statement (III) is not a happening that pertains to nonconformist challenge. Reflection over the needs of people who failed to prosper from the industrial revolution was a general chaacterisitc of the situation during the early years of the eighteenth century.

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Answer : (e) Reason: The following are theories of corporate governance: I. Macgregor’s Theory X and Theory Y. II. Stewardship Theory. III. Agency Theory. Answer : (c) Reason: The following statements are true about limited liability: I. It implies that the corporation is distinct from its owners and employees. II. Risk of loss is limited to the amount invested. Statement (III) is not true as if corporations are to become bankrupt, members of the corporation are not held liable individually. Answer: (b) Reason: People Pill is a defensive strategy for warding off a hostile takeover. In this case management threatens that, in the event of a takeover, the entire management team will resign. This is a very effective method if they are a good management team, in place, the loss of which would harm the company. Answer : (d) Reason: The following can be work place characteristics that make the management prone to fraud: I. Major performance-related compensation. II. High degree of innovation and progress. IV. Unduly aggressive financial targets. Statement (III) is incorrect in this context because inadequate (not excessive) monitoring of significant controls causes a possibility of fraud. Answer : (b) Reason: The following are unethical practice MNCs are accused of adopting in the area of personnel management: I. Exploiting low-paid foreign workers. II. Circumventing home country laws on business competition, labor relations etc. Statement (III) – encouraging ‘brain drain’ from poorer countries – is an unethica practice MNCs’ adopt in the area of technology.. Statemen (IV) – not respecting human rights – is an unethica practice MNCs’ adopt in the area of political activities. Answer: (a) Reason: A moral responsibility to preserve the environment is referred to as the anthropocentrism approach. (b) The anxiological approach is a moral responsibility to protect animals. (c) A radical approach to environmental responsibility is referred to as the eco-centric approach. Options (d) and (e) do not refer to any specific approaches.

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Answer: (d) Reason: The following are problems that arise during the transformation of individual moral standards to universal legal requirements at each stage of the political and social process: I. Lack of accurate information makes it difficult to form appropriate laws. II. Moral standards of members of society are misrepresented as consensus of large organizations. IV. Legal requirements formulated by political processes are often incomplete and imprecise. Statement (III) is not true because moral standards are diluted by the formation of small groups that emerge on the basis of beliefs, values and norms that are not widely accepted. Answer: (c) Reason: ‘Nothing will be produced until it is needed’ is the concept of just in time delivery. It implies that materials arrive ‘just in time’ when they are needed. (a) Procurement simply refers to the process of obtaining raw materials. (b) In order to ensure availability of raw materials, buyers often resort to ‘forward buying’ or buying the stocks to meet the future requirements. This is forward buying. (d) Simply put, total quality management is a management approach to long-term success through customer satisfaction. TQM is based on the participation of all members of an organization in improving processes, products, services and the culture in which they work. (e) Piling up of stocks apparently means accumulating stocks. Answer: (a) Reason: The Two-tier board addresses the concerns for separating the executive management from nonexecutive management. This structure has two separate boards: the non-executive supervisory board and the executive management board. The two-tier board of an organization is particularly useful in ensuring that the there is a counterbalance to the power of managers.

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20.

Answer: (b) Reason: The nomination committee carries out the selection of new non-executive directors of the company. (a) Audit committees act as a link between the board and the external auditors. (c) Remuneration committees are set up to objectively review the remuneration packages of the executive directors and other top-level managers. Options (d) and (e) are not committees of the board.

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21.

Answer : (a) Reason: Acknowledging the personal dimension to ethical behavior is included in Drummond and Carmichael’s approach. Clutterbuck’s approach is an institutional and control oriented approach. Therefore, options (b), (c), (d) and (e) are related to Clutterbuck’s approach.

22.

Answer : (d) Reason: Rights of shareholders is a an area of recommendation by the OECD.

23.

Answer: Reason:

(d) Building an amiable rapport or good relationship with government officials is not an unethical practice at the workplace. Options (a), (b), (c), and (e) are all unethical practices/issues related to the workplace.

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24.

Answer: (a) Reason: The main dilemma a multinational company faces in its global operations is the differences in ethical beliefs and value systems in its home country and the host country

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25.

Answer : (e) Reason: It is important for managers to ensure quality management because I. It is essential in order to expand an organization’s market and enter into new product lines. III. Companies can lose loyal customers in the long run if quality aspects that go unnoticed by customers are not taken care of. IV. Not ensuring quality can tarnish the image of the organization. Statement (II) is not a reason because quality management is to be ensured irrespective of the complexity of the decision making.

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26.

Answer : (a) Reason: Identifying stakeholders who will be affected by the decision is done in the first step i.e., ‘evaluating the decision’.

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17.

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27.

Answer : (c) Reason: The main elements of the social contract theory are (I) hypernorms and (IV) macro social contract. Therefore, option (c) is the answer.

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28.

Answer: Reason:

(d) Social issues are not addressed by corporate governance.

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29.

Answer: Reason:

(e) Option (e) is not true as according to the information technology act, 2000, acceptance in electronic form of any offer, culminating in any contract has been declared legal and enforceable.

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30.

Answer: (d) Reason: According to the enlightenment matrix, a company that reflects low self-interest and low philanthropy is involved in enlightened self interest. (a) If self-interest is low and philanthropy is high, it results in pure philanthropy. (b) If self-interest is high and philanthropy is high, it results social responsibility. (c) If self-interest is high and philanthropy is low, it results in cause related marketing. (e) Option is not relevant.

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Section B : Caselets 1.

(i)

Ethical relativism: People who support the concept of ethical relativism argue that there is no universal set of principles by which to judge morality. Each society has its rules and it is inappropriate to compare the ethical rules of one society with that of another. Just as subjectivists cannot comment on the actions of other individuals, relativist cannot pass judgment on the actions of societies other than their own. Relativists thus rule out the possibility of discussion across societies on ethical issues. They feel that the only alternative modes of ethical interaction across nations and societies are tolerance and conflict. Ethical relativism is the theory that holds that morality is relative to the norms of one's culture. That is, whether an action is right or wrong depends on the moral norms of the society in which it is practiced. The same action may be morally right in one society but be morally wrong in another. For the ethical relativist, there are no universal moral standards - standards that can be universally applied to all peoples at all times. The only moral standards against which a society's practices can be judged are its own. If ethical relativism is correct, there can be no common framework for resolving moral disputes or for reaching agreement on ethical matters among members of different societies. Therfore, many theorists reject this theory. But even if the theory of ethical relativism is rejected, it must be acknowledged that the concept raises important issues. Ethical relativism reminds us that different societies have different moral beliefs and that our beliefs are deeply influenced by culture. It also encourages us to explore the reasons underlying beliefs that differ from our own, while challenging us to examine our reasons for the beliefs and values we hold. (ii) Ethical subjectivism: The morally correct decision often depends on the circumstances of the person making it. Even with the same moral standards, two individuals may consider different decisions to be appropriate, if their individual circumstances are different. Ethical subjectivism argues that what is ethlically right or wrong for an individual depends on the ethical principles he or she has chosen. In other words, for people who subscribe to ethical subjectivism what is ethically right or wrong is entirely a personal matter. The problem with this argument is that it places no restrictions on the kind of ethical principles a person nlight choose. While a person lives by the principles he chooses, it is not necessary that these principles are ethical. The ethical intent is really important. To prove that one's principles are ethical, one has to give reasons, which must be able to withstand public scrutiny. Also, ethics cannot be a matter that is solely personal. (iii) Consequentialism: There are two central ideas associated with consequentialism. The first idea is the concept of value and the second that of maximization of value. Thus, if happiness is considered to be a value, an act is ethical only if it maximizes happiness. An act, which does not maximize happiness, is not ethically permissible. Therefore, ethical acts are undertaken in order to maximize happiness and it is assumed that they bring about happiness. The drawback here is that the act that causes happiness may not necessarily be ethical. And also many a times even if an ethical act causes unhappiness it can be in the best interests of everyone.

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2.

Differences in moral practices across cultures raise an important issue in ethics - the concept of ethical

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relativism. However, most ethicists reject the theory of ethical relativism for the following reasons:

3.

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Some claim that while the moral practices of societies may differ, the fundamental moral principles underlying these practices do not. For example, in some societies, killing one's parents after they reached a certain age was common practice, stemming from the belief that people were better off in the afterlife if they entered it while still physically active and vigorous. While such a practice would be condemned in our society, we would agree with these societies on the underlying moral principle -- the duty to care for parents. Societies, then, may differ in their application of fundamental moral principles but agree on the principles.

•

Also, it is argued, it may be the case that some moral beliefs are culturally relative whereas others are not. Certain practices, such as customs regarding dress and decency, may depend on local custom whereas other practices, such as slavery, torture, or political repression, may be governed by universal moral standards and judged wrong despite the many other differences that exist among cultures. Simply because some practices are relative does not mean that all practices are relative.

•

Other philosophers criticize ethical relativism because of its implications for individual moral beliefs. These philosophers assert that if the rightness or wrongness of an action depends on a society's norms, then it follows that one must obey the norms of one's society and to diverge from those norms is to act immorally. But such a view promotes social conformity and leaves no room for moral reform or improvement in a society. Furthermore, members of the same society may hold different views on practices. In the United States, for example, a variety of moral opinions exists on matters ranging from animal experimentation to abortion.

•

Perhaps the strongest argument against ethical relativism comes from those who assert that universal moral standards can exist even if some moral practices and beliefs vary among cultures. In other words, we can acknowledge cultural differences in moral practices and beliefs and still hold that some of these practices and beliefs are morally wrong. The practice of slavery in pre-Civil war U.S. society or the practice of apartheid in South Africa is wrong despite the beliefs of those societies. The treatment of the Jews in Nazi society is morally reprehensible regardless of the moral beliefs of Nazi society.

•

For these philosophers, ethics is an inquiry into right and wrong through a critical examination of the reasons underlying practices and beliefs. As a theory for justifying moral practices and beliefs, ethical relativism fails to recognize that some societies have better reasons for holding their views than others. But even if the theory of ethical relativism is rejected, it must be acknowledged that the concept raises important issues. Ethical relativism reminds us that different societies have different moral beliefs and that our beliefs are deeply influenced by culture. It also encourages us to explore the reasons underlying beliefs that differ from our own, while challenging us to examine our reasons for the beliefs and values we hold.

Companies that adopt and enforce a code of conduct can yield the following practical business benefits: Protect brand reputation: • The reputation of a company and its brands is a valuable asset that requires protection. More now than ever, consumers are examining and judging whether corporate practices are ethical. This includes practices of suppliers, whether wholly owned or independent, that are part of the value chain that provides profit to the brand. • Studies reveal that national legislatures and companies were the institutions least trusted by society, consumers are asking companies to demonstrate that working conditions are safe and fair, particularly in developing countries. • Codes of conduct are typically based upon compliance with local law and are also associated with international norms such as the International Labor Organization (ILO) covenants. When they are applied consistently and universally codes may help protect brand reputation by aligning business partner behavior with accepted norms. Increase reliability, trust, quality, and productivity: • Experienced brands suggest that their best business partners have reliable delivery times and dependable quality – and manage code compliance well. • The management and communication systems that enhance productivity and quality also enhance workplace conditions and give factory management the information they need to build a successful business. • It is increasingly common to hear that code of conduct programs have helped businesses simultaneously

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improve areas such as quality and efficiency and build greater trust with the buyer as a result. Strengthen legal compliance and reduce future risk and liability: • Codes are designed for universal implementation. In locations of lax legal enforcement, this is challenging, but still useful for identifying desirable, committed, and forward-thinking business partners. • Good labor standards may reduce the risk of future liability, in case laws are enforced or governments launch campaigns targeting industry. Workers themselves may seek redress for legal violations. Reduce negative publicity, increase ability to respond to crisis: • Implementing a code of conduct may prepare a company to respond to an unexpected crisis. Codes may provide staff with guidelines on making appropriate decisions thereby avoiding risk and communicating values to business partners. • Developing a code can provide a company with an awareness of issues that may arise and provides staff with relevant experiences to help guide its actions if something unexpected does occur. • Most importantly, should negative publicity occur, having a code and relevant experience with the issues allows a company to refrain from taking a defensive posture, or offering an unsatisfactory reaction; instead, the company may respond in a principled, flexible, and proactive manner to address the core issues. 4.

(i)

Corporate codes and their importance

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Corporate codes reflect the purpose of the company and guide the employees to behave in an ethical manner. In other words, they lay down the ethical standards of a company. Codes of conduct typically set guidelines on issues including child labor, forced labor, working hours, discrimination, freedom of association, and health and safety. They sometimes incorporate policies on environmental practices or security in shipping. Corporate codes are important to a company since they enhance clarity of strategy, better decision making, clearer communication and ease in delegation and inspires to have a commitment and loyalty for the organization. (ii) Corporate code formats Compliance codes: Directive statements, which provide guidance and prohibit certain kind of conduct. Corporate credos: The broad general statements of corporate commitments relating to constituencies, values and objectives. Management philosophy statements: The formal statements of the company or the CEO's vision of the business. Special documents: Special documents are also known as codes of conduct. They reflect company values, principles and guidelines. These documents communicate the purpose of the business and the nature of the relationship with suppliers, customers, consumers and stakeholders. Circulated letters: Circulated letters reflect the company's policies on certain issues concerning suppliers, contractors and buying agents. Compliance certificates: These certificates are especially designed for suppliers, contractors and buying agents to certify that they abide by the company's stated standards. Purchase Orders: Purchase orders are also referred to as letter of credit. They are drafted in accordance with the company's policies, which are aimed at contractual obligation for suppliers. 5.

The external stakeholders of a firm are: Consumers – Consumers/customers exchange resources for the products of the firms and thus provide the firm with revenues. Since corporations reinvest these earnings, customers can be said to be paying indirectly for the development of new products and services. The responsibilities of business corporations towards consumers are summed up by the five Rs’: •

Right quantity - Producing goods according to the specific needs of consumers, their purchasing power etc.

•

Right price - Offering quality goods at reasonable prices.

•

Right time - Providing prompt and adequate service to consumers.

•

Right quality - Improving the standard of living by producing goods and services of high quality. Ensuring the health and safety of customers. Treating customers fairly in all aspects of business

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transactions. • Right place Suppliers – Suppliers play a pivotal role in the success of any business since raw materials they supply will determine the final product’s quality and price. Good relationships with suppliers can reduce costs, which is the key to profitability. A company’s relationship with suppliers and subcontractors must be based on mutual respect. When dealing with the suppliers, organizations must •

Seek fairness and truthfulness in all activities, including pricing and licensing

•

Ensure that business activates are free from coercion and unnecessary litigation.

•

Foster long-term stability in the supplier relationship in return for value, quality competitiveness and reliability.

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Share information with suppliers and integrate them in the planning posses.

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Pay suppliers on time and in accordance with agreed terms of trade; and

•

Seek, encourage and prefer suppliers and subcontractors whose employment practices respect human dignity. Creditors – Usually organizations buy goods on credit from suppliers. Although suppliers have an important stake in a business, they may cease to fill orders if a company is unable to pay the amount due, or takes too long in making the payment. It is the responsibility of organizations to make timely payments to creditors for goods that have already been delivered. Competitors – Business entities are equally obliged to other business firms as they are towards stakeholders. Fair economic competition is one of the basic requirements for increasing the wealth of nations. Therefore, the responsibilities of the organization towards the competitors are: •

Foster open markets for trade and investment

•

Promote competitive behavior that is socially and environmentally beneficial and demonstrates mutual respect among competitors

•

Refrain from either seeking or participating in questionable payments or favors to secure competitive advantage

•

Respect both tangible and intellectual property rights

• Refuse to acquire commercial information by dishonest or unethical means such as industrial espionage. Community – The community gives the business the right to build or rent facilities, benefits from the tax revenues raised in the form of local services, infrastructure etc. In return for their services, the firm should act in a responsible way. The firm cannot expose the community to unreasonable hazards in the form of pollution and toxic waste. A forms responsibilities towards the society include:

6.

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Respecting human rights and democratic institutions

•

Supporting public policies and practices that promote human development through harmonious relations between business and other segments of society.

•

Collaborating with such activities that aim at improving the standards of health, education, workplace safety and economic well being.

•

Promoting and stimulating sustainable development and playing a leading role in preserving and enhancing the physical environment and conversing the earth’s resources.

•

Supporting peace security, diversity and social integration; respecting the integrity of local cultures

•

Encouraging charitable donations educational and cultural contributions and employee participation in community and civic affairs.

Cause related marketing (CRM) can be conceptualized as a commercial activity by which businesses and charities or causes form a partnership with each other to market an image, product or service for mutual benefit. It is an additional tool for addressing the social issues of the day through providing resources and funding whilst at the same time addressing business marketing objectives. The factors for the growing focus on cause-related marketing are: •

Growing pressure on large-scale companies to deliver and demonstrate that they are delivering, both shareholder value and societal value. The vision for creating both shareholder value and societal value rests on the fundamental premise that though profit is essential to run a business, the role of business in the society is to create or add value by designing such processes that help both the organization and the

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community to develop its capacities. The approach, therefore, does not challenge the role of the business, but it does challenge the way we think about, measure and manage that role and the different types of values it creates. •

Growing leadership concern, resonating across major industrial sectors, of how to bridge competitiveness and social cohesion. This concern has highlighted the importance of the community as a stakeholder in business activities. In order to create an enabling environment for running good business, business is today compelled to contribute towards the developmental aspects of the society.

•

The Indian consumer is more easily convinced by the goodness of the causes. Companies, which have been engaged in supporting social causes, feel that Indians are emotional and goodwill created in such exercises is an invaluable asset for companies. The goodwill created might not immediately translate into sales but it is there for you when you might need it the most. Citibank, for instance, has tied up with the WWF, the Indian Army and a women’s organization. Since the credit card contributes a part to the NGO it provides emotional benefits to the user (the feel-good factor leads to a sense of contributing to society and so on).

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Though the potential for CRM is currently underestimated, the research study undertaken by the students of NMIMS shows that when price and quality are equal, a partnership between a business and a charity or cause can strongly influence purchasers.

Section C: Applied Theory 7.

The main purpose of an ethical audit is to check the actions of a firm, which are directed at maximizing longterm owner value and to check the extent of distributive justice. The objectives of an ethical audit are:

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• To determine the extent to which the decision taken at all the levels of an organization are towards maximizing long-term ownership value and how well they are framed towards achieving distributive justice. • To help in providing a critical assessment of how well a business is actually run by systematically evaluating its business practice. • To help in scrutinizing the basis on which accounts are drawn and also evaluates whether management has reliable information in running the business. • To help businesses undergo major alterations like restructuring, Ethical audits are important for investigating into acquisitions or restructuring operations. • To determine the type of training necessary for the employees if the objectives and standards of business are either misunderstood or not properly implemented by them. An ethical measure to the effectiveness of such training. • To help in establishing ethical conduct of business and this helps in attracting valuable investments. • To help in establishing an ethical code of conduct for a business. This provides an objective measure when external auditors are performing audit. • To enhance, measure and promote the quality that increases business performance by assessing them against the ethical business objective. • To improve the quality of governance by evaluating the performance and ensuring that financial information is both available and reliable. • To help the stakeholders to evaluate the performance of the directors and also the directors to evaluate the performance of the stakeholders. 8.

(a) Differences between Corporate Governance and Corporate Management: 1. 2. 3. 4.

CORPORATE GOVERNANCE External focus. Governance assumes an open system. Strategy –oriented Concerned with where the company is going.

1. 2. 3. 4.

CORPORATE MANAGEMENT Internal focus. Management assumes a closed system. Task –oriented Concerned with getting the company there.

(b) The various models of corporate governance are: ¾ Anglo-American Model: Salient features of this model are

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• Shareholders elect the board of directors. • They take up the advisory role. • Shareholders usually control a private corporation through the board of directors. • The board of directors performs three functions on behalf the shareholders: representation, direction and oversight. • The Board appoints and supervises the officers (managers) who take care of the daily activities of the organization. ¾ German Model: Salient features of this model are • Even though the shareholders own the corporation, they do not directly control the governance mechanism. • Half of the members on the supervisory board are elected by the labor unions while the remaining are elected by the labor unions while the remaining are elected by the shareholders (owners). • Employees are not just stakeholders, but also have a say in the governance mechanism. Thus, employees become responsible for the policies that are to be implemented by them for attaining the objectives (profit, market share, high volumes … etc) of the organization. • The supervisory board, which is appointed jointly by the shareholders and the labor unions (employees), appoints and monitors the management board. This management board conducts the dayto-day operations of the organization independently. But, it has to report to the supervisory board. • One of the unique features of this model is that the labor relations’ officer finds a place on the management board. This ensures workers participation in the governance mechanism. ¾ Japanese Model: Salient features of this model are • In the Japanese model of corporate governance, the financial institutions have a major say in the governance mechanism. • The shareholders, along with the banks, appoint the members on the board. • Even the president is appointed on the basis of a consensus between the shareholders and the banks. The president consults the board and their relation is hierarchical in nature. Usually the board ratifies whatever decisions the president takes. • The financial institutions that finance the business have a crucial role in it even though the shareholders are the owners of the business. • The executive management (board of directors) carries out the management function. Sometimes the financial institutions monitor the management function by nominating the managerial personnel. • The banks even have the power to suspend the board in case of an emergency. ¾ Indian Model: Salient features of this model are • The Indian model of corporate governance is a mix of the Anglo-American and German models. Corporations in India can be grouped into three categories: private companies, public companies, banks and other corporations. • The founder, his family, and associates closely hold the private companies and they exercise maximum control over the activities of the company. The businesses of private companies like that of the Tata group, the Reliance group or the Birla group are financed by retained earnings or/and debt. The role of external equity finance is minimal. • In the case of public enterprise, the central and state governments choose the members of the board. Even after the disinvestments of some public sector companies, the government continues to have a considerable hold over the activities of the company. Here the interests of the stakeholders are given low priority. Large public sector enterprises are run to serve the interests of the government rather than aiming for efficiency and maximizing long-term owner value. < TOP OF THE DOCUMENT >