Mb321 - Oct 05

Question Paper Business Ethics & Corporate Governance (MB321) : October 2005 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.

Which of the following branches of ethics assesses whether moral values exist independently of humans or whether they are simply human conventions? (a) Meta ethics (d) Virtue ethics

2.

(b) Normative ethics (e) Teleological theory.

< Answer >

(c) Applied ethics

Which of the following is not a function of the corporate audit committee set up by the board?

< Answer >

(a) To discuss with independent auditors about the problems they experience in completing the audit (b) To review the interim and final accounts (c) To inform the board about the effectiveness of internal control and the quality of financial reporting as pointed out by the independent auditors (d) To make recommendations regarding the audit fee, selection and replacement of auditors (e) To select the new non-executive directors to the board. 3.

Which of the following is/are unethical practice(s) with respect to pricing of products? I. II. III. IV.

Charging a higher price for a product, which has a great demand. Charging a higher price for a product of good quality. Charging a higher price because of the consumer’s ignorance. Charging a low price so as to edge out smaller players.

(a) Only (III) above (c) Both (III) and (IV) above (e) All (I), (II), (III) and (IV) above. 4.

< Answer >

(b) Only (IV) above (d) (I), (III) and (IV) above

What ought to be/ought not to be done by individuals and compelling individuals to act in the ‘right’ desired manner, is the difference between

< Answer >

(a) Corporate governance and corporate management (b) Moral standards and law (c) Management philosophy and law (d) Ethics and compliance codes (e) Moral standards and corporate credos. 5.

Which of the following moral theories assert that whatever a culture thinks is right or wrong really is right or wrong for the members of that culture? (a) Utilitarianism (d) Virtue ethics

6.

Law can be used to regulate every aspect of business. An activity that is legal is morally permissible. The law does not employ moral judgments. Law is universal in nature.

(a) Only (I) above (c) Both (I) and (II) above (e) (I), (II) and (IV) above.

(b) Only (IV) above (d) Both (II) and (III) above < Answer >

Which of the following reflects pure hedonism? (a) (b) (c) (d)

(c) Relativism < Answer >

Which of the following is/are true? I. II. III. IV.

7.

(b) Egoism (e) Teleological theory.

< Answer >

Pleasure is neither to be sought nor avoided Pleasure is an evil to be avoided Pleasure and work both are good Pleasure and pleasure alone is good 1

(e) 8.

Work is worship. < Answer >

A practitioner of virtue ethics would argue that (a) Utilitarianism reflects the way people generally think (b) Most people in a complex ethical situation do what they feel comfortable with or what a person they admire would do (c) Deontological ethics generally reflects the way people think (d) Abstract principles are good benchmarks in resolving ethical dilemmas (e) People act according to standards laid down by eternal law.

9.

Which of the following is true with regard to ‘morality and ethics’? (a) (b) (c) (d) (e)

Ethics refers to philosophical inquiry, and morality to a sociological phenomenon They are synonymous Morality refers to a philosophical inquiry, ethics to a sociological phenomenon Ethics refers to religion, while morality refers to secular reasoning Morality pertains to religion, while ethics pertains to philanthropy.

10. Which of the following is/are responsibilities of shareholders? I. II. III. IV.

< Answer >

Maintaining good relationships with top management. To provide working conditions that respect each employee’s health and dignity. Conserving, protecting and increasing shareholders’ assets. To engage in negotiations when conflicts arise.

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

(b) Only (II) above (d) Both (II) and (IV) above

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

< Answer >

< Answer >

Acknowledge the personal dimension to ethical behavior Establish openness and transparency into decision making process Communicate ethical position Monitor symptoms of personal ethic related stress Explain your ground- rules to others.

12. Which of the following is not a benefit of self-regulations listed by International Capital Markets Group?

< Answer >

(a)

In self-regulation, it is possible to impose ethical standards, which go beyond those, which can be imposed by statutory legislation (b) Self-regulators are directly accountable to the members of their group (c) Self-regulators operate in an environment where there is willingness to accept regulations formulated from within for common good of the group (d) The regulated have an opportunity to participate at all levels of the self regulatory process (e) Official regulations are more comprehensive than self-regulations and are easier to operate and implement. < Answer >

13. Which of the following is not a function of the CEO? (a)

To assist the executive directors in formulating strategic proposals that have to be endorsed by board (b) To provide leadership and direction to all executive directors (c) To present the company to major investors, the media and government (d) To review the interim and final accounts in toto (e) To be able to identify the situation that requires intervention. 14. Which of the following is a recommendation of Kumaramangalam Birla committee report?

< Answer >

(a) A qualified and independent audit committee should be set up by the board of the company (b) While re-appointing members of the board, companies should give the attendance record of the concerned directors (c) There should be full transparency in matters relating to directors emolument (d) No single person should hold directorships in more then ten companies (e) Decision making power should not be vested in single person. 15. Which of the following is/are true with regard to ethical subjectivism? 2

< Answer >

I. People who support it argue that there is no universal set of principles by which to judge morality. II. The morally correct decision often depends on the circumstances of the person making it. III. It does not place restrictions on the kind of ethical principles a person might choose. (a) Only (I) above (c) Both (I) and (III) above (e) (I), (II) and (III) above.

(b) Only (II) above (d) Both (II) and (III) above

16. __________ ethical problems occur in corporate acquisitions, marketing, personnel policies, capital investments etc. (a) Overt (d) Hedonist

(b) Covert (e) Explicit.

< Answer >

(c) Separatist < Answer >

17. Which of the following is a problem related to distributive justice? (a)

The primacy of the value of justice is dependent upon the acceptance of the proposition that an equitable allocation of benefits ensures social cooperation (b) Moral standards are based upon the primacy of a single value - justice (c) There are multiple interpretations of the law (d) An additional value is required to balance the benefit-cost equation (e) The primacy of the value of justice is based on the acceptance of the proposition that a market system of exchange ensures social productivity. 18. Which of the following is incorrect with respect to a macro social contract?

< Answer >

(a)

Local communities must be allowed ‘moral free space’ to spell out obligatory ethical norms for their members (b) The macro social contract must be based on the free consent of the parties involved (c) All macro social contracts must be compatible with hypernorms (d) Conflicts must be resolved through priority rules (e) Macro social norms are developed for a community, a group and an organization. < Answer >

19. Corporate moral excellence focuses on (a) (b) (c) (d) (e)

Corporate social responsibility and ethical behaviour Corporate governance and ethical behaviour Corporate culture and ethical behaviour Stakeholders and ethical behaviour Law and ethical behaviour.

20. Organization for Economic Cooperation and Development (OECD) has developed privacy guidelines for digital marketing. Which of the following is not one of these guidelines? (a) (b) (c) (d) (e)

Gather and store only information that is pertinent to the business Collect customer data from all sources available Tell customers how the data will be used If requested, let the customer see what information about them is available with the company Use the data for the originally intended purpose.

21. Which of the following is not an issue/right pertaining to clients in ethical research? (a) (b) (c) (d) (e)

< Answer >

< Answer >

Right to anonymity Right to quality research Protection against misleading presentation of data Inappropriate use of research techniques Protection against abuse of position.

22. Principles that apply equally to all human beings such as basic human rights are called (a) Moral values (c) Hypernorms

(b) Macro social contract (d) Micro social contract

(e) Paranorms.

23. As per analysis by Hellriegel, Slocum and Woodman, which of the following principles implies that the operation manager decides upon the methods of action and rationale that has to be adopted in communicating to those affected? (a) Intuition (c) Disclosure

(b) Conventionalist (d) Professional ethic

< Answer >

< Answer >

(e) Categorical imperative.

24. The process by which large amounts of illegally obtained money (from drug trafficking, terrorist activity or other serious crimes) is given the appearance of having originated from a legitimate source is 3

< Answer >

activity or other serious crimes) is given the appearance of having originated from a legitimate source is called (a) Insider trading (c) Anonymous Trading (e) Bottom Up Investing.

(b) Money laundering (d) Bunching

25. Which of the following is not a practice that Multinational companies are often accused of? (a) (b) (c) (d) (e)

< Answer >

Use of expensive technology Not respecting human rights Paying protection money to terrorist groups Destabilizing national governments of which they do not approve Paying bribes to secure political influence.

26. Which of the following does not pertain to the purpose of a corporation? (a) Transferability (c) Social structure (e) Ubiquity and flexibility.

< Answer >

(b) Human satisfaction (d) Efficiency and efficacy < Answer >

27. Which of the following is/are issues in designing a board? I. Board size. II. Role of the Chairman and the Chief Executive. III. Duality in subsidiary company board. (a) Only (I) above (c) Only (III) above (e) All (I), (II) and (III) above.

(b) Only (II) above (d) Both (I) and (II) above

28. Which of the following board styles lays emphasis on maintaining cordial interpersonal relations? (a) Rubber stamp (d) Professional

(b) Country club (e) Two-tier.

(c) Representative

29. The board plays a role in which of the following strategy development level(s)? I. II. III. IV.

< Answer >

< Answer >

Systematic level strategy. Structural and portfolio strategy. Implementation strategy. Departmental strategy.

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

(b) Only (II) above (d) (I), (II) and (III) above

30. Which of the following unethical practices were prevalent in China in the early 1990s’? I. Child labor. II. Prison labor. III. Remuneration discrimination. (a) Only (I) above (c) Only (III) above (e) ( I), (II) and (III) above.

(b) Only (II) above (d) Both (I) and (II) above END OF SECTION A

Section B : Caslelets (50 Marks) • • • • •

This section consists of questions with serial number 1 – 6. Answer all questions. Marks are indicated against each question. Detailed explanations should form part of your answer. Do not spend more than 110 - 120 minutes on Section B. 4

< Answer >

Caselet 1 Read the caselet carefully and answer the following questions: 1.

2.

Assume that the board decided to continue selling to the pacemaker company. What are the factors that would have driven them to make such a decision? Can they balance their business goals with their virtues? Explain. (7 marks) < Answer > Deciding whether or not to continue to sell was a strategic decision for the transistor company. Explain (i) The ethical decision-making model or process. (ii) The principles underlying an ethical approach to management. (4 + 5 = 9 marks) < Answer >

The heart pacemaker is a modern wonder. The device has a timer that resets itself every time the patient's heart beats. If the heart does not beat on schedule (say, within 1.2 seconds), the pacemaker gives a stimulus that causes a heartbeat. But the technology was not always so sophisticated, and had many limitations in its early stages. It's 1975, and you are on the board of directors of a company that makes transistors. Among the many companies with whom you have a contract is one that makes heart pacemakers. Pacemaker technology is in its infancy. When doctors implant a pacemaker, the patient's normal heartbeat is disabled, and he or she relies entirely on the device. If it fails, the patient's heart stops. Doctors are not very adept at installing the pacemakers, which are extremely delicate; there is even a story of a person yawning deeply, pulling the pacemaker wire in his chest, and dying. After that and many similar incidents, the board begins to reconsider whether your company should sell to the pacemaker company. Members of the board feel this situation is a major lawsuit just waiting to happen and your company, as well as the company you supply, will be liable. In addition, you feel the specs the pacemaker company uses to test the transistors are not very strong. You and the board decide to get out of the business before it's too late. You tell the pacemaker company representatives about your conclusion, and they respond, "You can't stop selling us the transistors. You are the sole remaining supplier for us. Everyone else has backed out for the same reasons you're giving. If you don't sell us the product, we'll go out of business. Pretty soon, no one will be making heart pacemakers, and many people need them. Without the pacemaker, people don't even have a chance." You take that information back to the board. You find that people around the table have different opinions. The founders were the children of blue-collar parents. Their fathers were plumbers, electricians, and carpenters, who had passed on a core set of values to their children and who belonged to an era where there was no greed. One person says, "This is a bad deal, and it isn't our problem. We don't make enough on this sale to make the risk worthwhile." Another person says, "We don't know how other companies use the transistors we sell them; why should we be concerned about this one? What about that baby who died when the transistor in the incubator failed? We didn't know how that company was using the transistor." Another person says, "I think we're missing the real issue here. Don't we have an ethical obligation to sell the product to the pacemaker company? What will happen if we don't sell to them?" Another person says, "Give me a break. Our only obligation is to our shareholders. And how did we get so stupid that we're the last source? I'm telling you, we don't need this." In other words, legal was saying, "This is a time bomb waiting to happen. Why are we even talking about this? " Engineering was bemoaning the lack of standards for testing the electronics of pacemakers, and the majority of the Board understood that they had a problem with no easy solution. Finally, the chair of the board says, "OK. Let's make a decision." You wonder if the board can really find a way out without sacrificing business and still live out their parents’ virtues.

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

4.

Explain the importance of environmental ethics and why being environmentally responsible has become so crucial for a company in today’s competitive business environment. (7 marks) < Answer > Discuss in detail the various steps taken by Nokia to ensure that its activities or products are not harmful to the natural environment. Give examples of at least two other companies, which are environment conscious.

(10 marks) < Answer > Nokia is a company, which has recognized and taken up the issue of environmental management seriously. They are very much conscious about environmental ethics and have taken many steps to ensure that they do not cause any harm to the environment. Nokia’s strategy for sustainable environmental development covers the whole value chain and is implemented through 5

four key programs – Design for Environment, Supplier Network Management, Environmental Management Systems and sound End-of-Life Practices. Nokia's environmental strategy focuses on increasing eco-efficiency throughout their operations. This strategy is based on the key elements of Nokia’s business vision – mobility, growth, and quality. Ecoefficiency means producing better results from less material and energy. The environmental attributes of a Nokia product are linked with the use of materials and energy at the different stages of its life cycle. Nokia’s approach is to reduce the adverse environmental impact of a product at each stage of this cycle, from the extraction of raw materials to recycling and the reintroduction of materials into the economic system. When implementing life cycle thinking, it is vital to take into account the differing requirements of different products at each stage of the life cycle. For instance: For mobile phones, raw material extraction and component manufacture account for most of the overall environmental impact. For network equipment, energy consumption during use is more significant. Nokia wants to ensure that life cycle thinking is applied to each product group in an efficient way. To this end, they have established four key environmental programs. Choices made during the design phase have an affect on the environmental performance of a product throughout its life cycle. Nokia’s approach to product design is to make their products more environmentally efficient through the Design for Environment program. Nokia's current priorities are: Increasing the energy efficiency of the products, clarifying the content of their products, including the quantity and type of materials used and designing products for efficient use, reuse and recycling. Large part of the environmental impact of the Nokia product life cycle arises from the activities of their suppliers around the world. To facilitate cooperation with suppliers, Nokia has established a Supplier Network Management program. The program includes a set of Supplier Requirements that must be met by all suppliers. To ensure compliance, trained Nokia personnel conduct regular audits as part of normal supplier assessment. Nokia expects its suppliers to meet the requirements through their own efforts, but can and does provide support if requested. Suppliers are required to apply these same standards to their own suppliers and to support this through audits. Specific environmental audits focus on suppliers who could potentially pose environmental risks. Nokia is expanding its Environmental Management Systems to encompass all larger facilities around the world. At Nokia, environmental matters are integrated into a unified management system, a set of Nokia-wide standards are applied when a new production site is established anywhere in the world. Nokia supports efforts to reclaim and reuse raw materials from recycled products. End-of-Life Practices (EoL) involve the collection of equipment at the end of its service life so that materials and energy can be recovered and harmful substances properly disposed of. The focus areas of the EoL development work are: maximizing the recyclability of products through Design for Environment, drawing-board decisions about materials and structural design that have a direct bearing on recyclability and ease of disassembly, monitoring, comparing and developing take-back and recycling systems in cooperation with recyclers and other stakeholders and actively reducing the use of potentially harmful substances in products during the design phase.

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. (10 marks) < Answer >

6.

What are the reasons for the increasing focus on cause related marketing? Elucidate. (7 marks) < Answer >

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 6

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.

This section consists of questions with serial number 7 - 8. Answer all questions. Marks are indicated against each question. Do not spend more than 25 -30 minutes on section C.

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? Explain the various models of corporate governance. (10 marks) < Answer >

8.

The Adelard Company decided to review the composition and structure of its current board in order to increase its effectiveness and better focus their time on strategic planning issues. Explain (i) The types of directors that could constitute the board of Adelard. (ii) The types of board structures that Adelard could consider. 7

(10 marks) < Answer >

END OF SECTION C END OF QUESTION PAPER

8

Suggested Answers Business Ethics & Corporate Governance (MB321) : October 2005 1.

Answer : (a) Reason : Meta ethics assesses whether moral values exist independently of humans or whether they are simply human conventions. (c) Applied ethics deals with specific often controversial moral issues such as abortion, female feticide and infanticide, displacement of tribal people due to huge hydro electrical projects, cloning, testing drugs on animals etc. Business too face many controversial moral issues such as misleading advertising, insider trading, bribery and corruption etc. (d) Virtue ethics is concerned with attaining these dispositions of character or personality that an individual desires in himself or others. (e) Teleological ethics states that an action is considered morally correct if the consequences of that action are more favorable than unfavorable.

< TOP >

2.

Answer : (e) Reason : Selecting non-executive directors to the board is not the responsibility of the corporate Audit committee. Some of the functions of a corporate audit committee are: (i) to discuss with independent auditors any problems that they experience in completing the audit, (ii) to review the interim and final accounts in toto, (iii) to inform the board about the effectiveness of internal controls and the quality of financial reporting as pointed out by the independent auditors. To make recommendations regarding the audit fee, selection and replacement of auditors.

< TOP >

3.

Answer : (d) Reason : Charging a higher price for a product, which has a great demand is unethical. For example, a consumer may be willing to pay more for a food product he consider to be healthy. This when priced higher due to the increase in demand becomes unethical. Charging a higher price for a product of good quality is not unethical. Charging a higher price because of the consumer’s ignorance about the price being right or not is unethical. Charging a low price so as to edge out smaller players who do not have the money to cope with strategies of bigger competitors is unethical. Therefore option (d) is the correct answer.

< TOP >

4.

Answer : (b) Reason : What ought to be/ought not to be done by individuals and compelling individuals to act in the ‘right’ desired manner is the difference between moral standards and law. There is an overlap between the two but law always does not represent collective moral judgments.

< TOP >

5.

Answer : (c) Reason : The theory of cultural relativism implies adopting the norms of the country in which an organization operates its business taking it to be right. Therefore, it asserts that whatever a culture thinks is right or wrong really is right or wrong for the members of that culture.

< TOP >

6.

Answer : (b) Reason : The statement (IV) ‘law is universal in nature’ is true. The term universal implies being applicable to all. The requirement how to act or not to act in a given situation has to be universal, as law is applicable to every one who faces similar circumstances. Statement (I) is not true as some aspects of business are better regulated through custom than through law. Statement (II) is not true because not all legal actions are morally appropriate. Since the law uses moral terms like ‘good faith’ law does employ moral judgements. Therefore, statement (III) is also not true.

< TOP >

7.

Answer : (d) Reason : According to the hedonist principle, a worker expects reward for little effort. Therefore, the statement pleasure and pleasure alone is good is a statement of pure hedonism.

< TOP >

8.

Answer : (b) Reason : Virtue ethics relate to any disposition of character or personality that an individual desires in himself or others. Therefore, a practitioner of virtue ethics would argue that most people in a complex ethical situation do what they feel comfortable with or what a person they admire would do. (a) Utilitarianism judges the weightage of favorability over unfavorability of actions. (c) Deontological theory focuses on fundamental duties that people have as human beings like duties to God, oneself and others. (d) Virtue ethics emphasizes actions based on individual dispositions rather than abstract moral principles. (e) Since virtue ethics relate to any disposition of character or personality that an individual desires in himself or others, 9

< TOP >

actions will not be directed by eternal law. 9.

Answer : (c) Reason : Morality refers to a philosophical inquiry, ethics to a sociological phenomenon. Morality relates to the conduct of a person, therefore is philosophical enquiry and ethics relates to a system of moral principles and principles for applying them, and is a sociological phenomenon.

< TOP >

10.

Answer : (c) Reason : The following are Shareholders responsibilities

< TOP >

•

Maintaining good relationships with top management

•

Conserving, protecting and increasing the share holders assets

•

Exercisining their voting right

•

The organization must honor the trust of share holders

•

Managing the company efficiently in order to secure a fair and competitive return on the owner’s investment.

•

Disclosing relevant information to shareholders subject only to legal requirements and competitive constraints

• Respecting the share holders request. Hence option (c) is the answer 11.

Answer : (b) Reason : Establishing oneness and transparency into decision making process is included in the Clutter buck approach. The remaining options are included in Carmichael and Drummond’s approach.

< TOP >

12.

Answer : (e) Reason : Self regulations are more comprehensive than official regulations and are easier to operate and implement. All other statements are benefits of self-regulation. Hence option (e) is the answer.

< TOP >

13.

Answer : (d) Reason : The following are functions of a CEO

< TOP >

•

To assist the executive directors in formulating strategic proposals that have to be endorsed by board • To provide leadership and direction to all his executive directors • To present the company to major investor, the media and government • To be able to identify the situation that requires intervention. To review the interim and final accounts in toto is not a function of CEO. Hence, option (d) is the correct answer. 14.

Answer : (a) Reason : “A qualified and independent audit committee should be set up by board of the company” is one of the recommendations of the Kumaramangalam Birla committee report.

< TOP >

15.

Answer : (d) Reason : According to the theory of ethical subjectivism, (II) the morally correct decision often depends on the circumstances of the person making it and (III) the theory does not place restrictions on the kind of ethical principles a person might choose. People who support ‘ethical relativism’ argue that there is no universal set of principles by which to judge morality, hence statement (I) is not true about ethical subjectivism.

< TOP >

16.

Answer : (b) Reason : Covert ethical problems occur in corporate acquisitions, marketing, personnel policies, capital investments etc. They are complex, clear and have deft ethical solutions.

< TOP >

17.

Answer : (a) Reason : The problem with distributive justice is that the primacy of the value of justice is dependent upon the acceptance of the proposition that an equitable allocation of benefits ensures social cooperation.

< TOP >

18.

Answer : (e)

< TOP >

10

Reason : Macro social contracts provide global norms. Micro social contracts are developed for a community, a group and an organization. Hence, option (e) is incorrect about macro social contracts. 19.

Answer : (c) Reason : Corporate moral excellence focuses on corporate culture and ethical behaviour.

< TOP >

20.

Answer : (b) Reason : The guidelines suggest that data should be collected only from the customer. Therefore, option (b) is the answer.

< TOP >

21.

Answer : (d) Reason : Inappropriate use of research techniques is an issue/right pertaining to the research profession and not the client. Therefore, option (d) is the answer.

< TOP >

22.

Answer : (c) Reason : Universal norms such as basic human rights of personal freedom, physical security, and well being, political participation, informed consent, ownership of property an the right to subsistence that apply equally to all human beings are called hypernorms.

23.

Answer : (c) Reason : According to the disclosure principle, the operation manager decides upon the methods of action and rationale that has to be adopted in communicating to those affected

24.

Answer : (b) Reason : The process by which large amounts of illegally obtained money (from drug trafficking, terrorist activity or other serious crimes) is given the appearance of having originated from a legitimate source is called money laundering. (a) Insider trading refers to trading on price sensitive information by company employees or individuals closely connected with the firm. (c) Anonymous Trading: Visible bids and offers on the market without the identity of the bidder and seller being revealed. (d) Bunching: The combining of odd lot or round-lot orders for the same security so that they may be executed at the same time. (e) Bottom Up Investing: An investment approach that de-emphasizes the significance of economic and market cycles. This approach focuses on the analysis of individual stocks.

< TOP >

25.

Answer : (a) Reason : Use of expensive technology is not a practice that multinational companies (MNCs) are often accused of. Options (b), (c), (d) and (e) are all practices that find criticism with regard to the functioning of MNCs.

< TOP >

26.

Answer : (a) Reason : Transferability is a characteristic of a corporation that attracts investors. All other options are purposes of a corporation

< TOP >

27.

Answer : (e) Reason : The board size, role of the Chairman and the Chief Executive and duality in subsidiary company board are issues in designing a board.

< TOP >

28.

Answer : (b) Reason : The country club board lays emphasis on maintaining cordial interpersonal relations.

< TOP >

29.

Answer : (d) Reason : Systematic level strategy, structural and portfolio strategy, and implementation strategy are strategy development levels in which the board plays a role.

< TOP >

30.

Answer : (e) Reason : Many countries entered China in the early 1990s’ to take advantage of cheap labor. Children were exploited and paid much less than adults. Workers in prison were also used to produce these goods. Therefore option (e) is the correct answer.

< TOP >

11

< TOP >

< TOP >

Section B : Problems 1.

The members of the board took seriously their responsibility and duty to protect the rights of people who needed pacemakers at the same time as they balanced their fiduciary responsibility to the current company. This sense of responsibility stemmed from the fact that they inherited a core set of values from their fathers who were the founders of the company. They understood that "doing the right thing" did not have to be stupid, and that they could both do the right thing and do well for the company ("DO RIGHT" AND "DO WELL," rather than having to choose one or the other.) So, they continued to sell to the pacemaker company. They should also have instructed their engineers to develop more rigorous testing and technical standards they could hold the other company to. They could reserve the right to stop selling if the other company did not improve its technical standards. They should have taken steps to be sure they did not have a legal liability down the line and then turned it over to the other company to improve the quality of its products. In these ways they would reduce harms and maximize utility. It would be fair to single out the industry because it was new and standards were developing, an equal way of treating start-up industries. They should have shown compassion without sacrificing business, and thereby live out their parents' other virtues. In this way they would serve the common good, protecting people's rights to a promising new medical technology, the pacemaker. < TOP >

2.

Ethical Model Making Decision Businesses arc characterized as complex and ambiguous. In spite of such complexities, managers have to strike a balance between right and wrong decisions and identify the right course of action. At this stage, most organizations make use of an ethical decision-making model, which provides a framework for tackling ethical issues. The ethical decision making model is not a substitute for moral or business leadership; only guides managers in making ethical decisions. It helps managers to identify the business problems and helps them to work out the best way of resolving these problems. The ethical decision-making recommends a four step: • • • •

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

The first step is to identify the stakeholders who will be affected by the decision. Managers need to determine whether the proposed decision will violate the fundamental rights of its shareholders. The second step is to judge the decision on the basis of certain moral principles. This implies, the principles stated in the mission statements and moral principles of the company forms the basis for the judgment. The third step is establishing the moral intent. This implies that the organization must prioritize those activities, which arc aimed at resolving moral concerns. While resolving the moral concerns, organizations should ensure the involvement of top and middle management. Because, the involvement of only top-level managers tend to narrow down the 'economic interest' of the shareholders. The fourth step is to ensure that all participants engage in ethical behavior. If an organization wants to behave in ethical manner, then it should be directed to behave it so. Usually corporate code guides the employees to behave in an ethical manner. Principles Underlying Ethical Approach Strategic Management There are three principles for efhica1 approach to strategic management. They are: Stakeholder Theory, Strategy and Ethics The stakeholder theory is rooted in the belief that business is an activity of society, and hence business has responsibilities to a much wider range of stakeholders than merely its shareholders, directors, and creditors. The stakeholder theory opposes a 'bolt-on' ethics mentality, which stems from the fact that the business community sees itself as doing its best to survive in a hostile environment. With this kind of an attitude business strategy becomes merely a matter of reaching to internal and external threats. In such a situation, ethically correct decisions are acceptable only when they make good sense. An alternative way of looking at ethics is to view business as having a pro-active role in creating an ethical 12

society. The argument is that business is such a pervasive and powerful force in contemporary life, that it can no longer confine itself to a narrow universe of accounting goals. Loyalty and Psychological Contract The relationship between employer and employee based on a 'psychological contract'. The employees' loyalty to the organization is a key element of this contract. Employees have certain expectations about how they will be treated, and in turn, are willing to make certain sacrifices for the organization. Every strategic change calls for some sacrifice by the employees. A successful strategic change requires the commitment of all the organization members; The ethical issue here is that efforts must be made to convince people that the change is legitimate. Employees will continue to remain loyal to the organization only if they are sure that their psychological contract with the firm is not undermined. Cultural Relativism There are no worldwide standards for the conduct of business, Cultural norms and values vary within the country and also between countries, What is considered as unlawful in one country may be considered a normal business practice in some other country. For instance, in some countries lobbying is considered legitimate, while in a country like India, it is regarded as an unethical business practice. Value systems too, vary form country to country. While 'individual' needs are primary importance in North America, 'group' needs take precedence in Japan. Differences in culture often pose problems for firms that operate in foreign countries. One way of dealing with this problem is to adopt cultural relativism. The term cultural relativism implies, adopting the norms of the country, in which an organization operates its business. For instance, if bribes are considered a part of normal business practice then the fact must be accepted. But carrying too far raises serious ethical issues. Is it ethically correct to accept certain practices like sacrificing children to the 'Gods' or chopping off the hands of thieves? Can these practices be unequivocally endorsed in the name of culture relativism? As global operations become increasingly important for long-term survival of MNC's, these difficult ethical issues related to cultural relativism are likely to increase. < TOP >

3.

Environmental ethics is a branch of applied ethics, which examines the moral basis of environmental responsibility. Environmental responsibilities have to be weighed against the responsibilities against the responsibilities to stakeholders and societal benefits, as any damage caused to environment has an impact on society as well as on stakeholders. Environmental issues such as toxic waste, contamination of ground water, oil spills destroying the seashores, usage of fluorocarbon that deplete the ozone layer etc can be tackled by espousing environmental ethics. Thus, the goal of environmental ethics does mainly revolve around the concern about the environment and also the moral foundation of environmental responsibility. A successful foundation for environmental ethics should fulfill two tasks. First it has to explain how human beings have degraded the environment. Second, it must explain how human beings can protect the environment. Being environmentally responsible has become crucial for any company today. Corporate environmental management encompasses greening of manufacturing, greening of communication, greening of strategy and greening of marketing. Organizations adopt green initiatives due to the following reasons: 1. Economic benefits from increased efficiency. 2. Competitive advantage through innovation. 3. Public image. Green initiatives in business range from environmentally friendly technological innovation, green tourism, environmental campaigning and environmental counseling. If companies do not take up the responsibility of whatever harm they have done to the environment, they will be the ultimate sufferers. < TOP >

4.

Nokia is very much conscious about environmental ethics and have taken many steps to ensure that they do not cause any harm to the environment. Nokia’s strategy for sustainable environmental development covers the whole value chain and is implemented through four key programs: (i) Design for Environment - Nokia's current priorities are: Increasing the energy efficiency of the products, clarifying the content of their products, including the quantity and type of materials used and designing products for efficient use, re-use and recycling. (ii) Supplier Network Management - Large part of the environmental impact of the Nokia product life cycle arises from the activities of their suppliers around the world. To facilitate cooperation with suppliers, Nokia has established a Supplier Network Management program. The program includes a set of Supplier Requirements that must be met by all suppliers. To ensure compliance, trained Nokia personnel conduct regular audits as part of normal supplier assessment. Nokia expects its suppliers to meet the requirements through their own efforts, but can and does provide support if requested. Suppliers are required to apply these same standards to their own 13

suppliers and to support this through audits. Specific environmental audits focus on suppliers who could potentially pose environmental risks. (iii) Environmental Management Systems – Nokia is expanding its Environmental Management Systems to encompass all larger facilities around the world. At Nokia, environmental matters are integrated into a unified management system, a set of Nokia-wide standards are applied when a new production site is established anywhere in the world. (iv) End-of-Life Practices - End-of-Life Practices (EoL) involve the collection of equipment at the end of its service life so that materials and energy can be recovered and harmful substances properly disposed of. The focus areas of the EoL development work are: maximizing the recyclability of products through Design for Environment, drawing-board decisions about materials and structural design that have a direct bearing on recyclability and ease of disassembly, monitoring, comparing and developing take-back and recycling systems in cooperation with recyclers and other stakeholders and actively reducing the use of potentially harmful substances in products during the design phase. Examples of other companies: Samsung: Has green policies in place. Motorola: has a environment management system in place which takes care of the environmental activities and control. ABB ABB's Vadodara plant ranked as the greenest company in India. The company organized a green campaign as a part of its environmental policy. The campaign encouraged employees to plant about 2500 trees in its 100-acre premises. But the problem aroused when they had to dispose off the dry leaves twigs and wooden wastage. ABB in an attempt to solve the problem opted for Vermiculture (breeding earthworms). The practice of Vermiculture proved to be successful as dry leaves turned out to be the fodder for earthworms and dead wood was converted into organic manure. The company used about 80% of the manure for it’s gardening and sold the rest. The companies also implemented ISO 14001 at all its offices, to gauge 'corporate sustainability' i.e. economic, social and environmental performance. This program was implemented with an aim of reducing the wastes, identifying environmental hazards and maximizing resources. ICI India One of the strengths of lCI is its SHE (safety, health and environment) principle. The principle states, "The ICI group will ensure that all its activities world wide are conducted safely; the health of its employees, its customers and the public will be protected; environmental performance will meet contemporary requirements, and that its operations are run in a manner acceptable to the local communities’. ICI also insists that local management ensure that the physical environment is not destroyed by the manufacturing facilities. The firm ensures that in the process of production, there are few or no chances of any chemicals being used in the process to come in the contact with the external environment. And all solvents that are being used in the production of paints are being recycled. The firm ensures that no pollutants or waste will be discharged during the entire production process. To prevent accidents caused by fire, the ICI plants have tanks that can hold enough water for 3 hours of fire fighting. ICI's concern for human and environmental safety has placed it high in the host list of "green" companies. . Tata Iron and Steel It seemed almost impossible for Tata Iron and Steel Company to strike a balance between: its production objectives and environmental responsibilities. Yet, surprisingly, it succeeded in achieving both. The company planted around 1.5 million plants to celebrate its adoption of a green policy and the closure of its old and environmental unfriendly steel unit. It also took an initiative to modernize the environmental related equipment and had already spent Rs. 7,000 crores. The company is known for its unique HR approach for ensuring the safety of the environment. The company created the post of 'safety and environment inspectors' for inspecting oil leakages, water or stream leakages, noise levels of equipment and segregation of waste etc. Thus companies with unique environmental policy are listed on the green list. For these companies one of the main objectives is to preserve the environment by reducing the wastage and frame effective eco-friendly policies. < TOP >

5.

The external stakeholders of a firm are: Consumers – Consumers/customers exchange resources for the products of the firms and in return receive the 14

benefits of the products. They provide the lifeblood of the firm in the form of revenue. Since corporations reinvest these earnings, customers can be said to be paying indirectly for the development of new products and services. By paying attention to consumer needs, management automatically addresses the needs of suppliers and owners. The responsibilities of business corporations 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 transactions. • Right place Suppliers – Often suppliers are not included in the list of a firm’s stakeholders. But 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. In this era of global competition, ability to control costs rather than the ability to increase sales is the key to profitability. Good relationships with suppliers can reduce costs. 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.

•

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

•

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 – Creditors play an important role in organizations. 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. Organizations often delay in repaying the credit to creditors. It is the responsibility of the organization to make timely payments for goods that have already been delivered. Competitors – Business entities are equally obliged to other business firms as they are towards stakeholders. In an era of global competition, firms compete with each other to grab a minor share on all possible front In this connection, the competitive practices adopted by firms can sometimes be questionable. 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: • 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. < TOP >

15

6.

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 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. This exciting concept is already gaining wide acceptance with major businesses, charities and causes. CRM has enormous potential to make a significant difference. 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). 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. < TOP >

Section C: Applied Theory 7.

Difference between Corporate Governance and Corporate Management: CORPORATE GOVERNANCE 1. External focus. 2. Governance assumes an open system. 3. Strategy –oriented 4. Concerned with where the company is going.

CORPORATE MANAGEMENT 1. Internal focus. 2. Management assumes a closed system. 3. Task –oriented 4. Concerned with getting the company there.

The Various models of Corporate Governance: Anglo-American Model In this model of corporate governance, 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. German Model In the German model of corporate governance, 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). In this model the 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 day-to-day operations of the organization independently. But, it has to report to the supervisory board. One of the unique features of this 16

model is that the labor relations’ officer finds a place on the management board. This ensures workers participation in the governance mechanism. This model of corporate governance and the relationship between various constituents. Japanese Model 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. In this model 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. In this model, 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. Indian Model 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 longterm owner value. < TOP >

8.

Types of Directors Directors can be categorized into various "types" depending on their relationship with the management of an organization. The different types of directors are: The Executive director performs a dual role as a member of the board of directors and as an executive in the organization. He is appointed as a director by the shareholders and, according to company law, is responsible to the shareholders like any other type of director. As an executive, he is an employee of the organization and is bond by an employment contract. Non-executive director is one who does not hold an executive position in the organization on whose board he works. Non-executive directors are also known as outside directors. They can be further divided into two categories depending on their independence. According to Kumaramangalam Birla report Independent directors are directors who apart from receiving director's remuneration do not have any other material pecuniary relationship or transactions with the company, its promoters, its management or its subsidiaries, which in the judgement of the board may affect their independence of judgement. Further, all pecuniary relationships or transactions of the non-executive directors should be disclosed in the annual report. Nominee directors are those who are appointed to the board of directors by the major shareholders or financial institutions like banks, mutual funds etc. These directors work towards safeguarding the interests of their principles (shareholders, banks etc.). Even though external stakeholders like banks appoint them, they, along with other directors, should act in the overall interest of the company. Representative directors are similar to nominee directors. They safeguard the interests of stakeholder groups like employees, customers etc. But they also act in the overall interests of the company. Alternate directors are appointed as per the Articles of Association to act as substitutes in absence of an original director. These alternate directors enjoy all the powers of the directors they represent on the board. Shadow directors are those who influence the decisions of the board without formally being present\ on the board. Thus type of directorship is seen in some family owned comp31ues. But when there is evidence to prove their influence, they can be held responsible for the acts of the company along with the directors of the board. Some companies give titles like associate directors to managers as a token of appreciation or status symbol within the hierarchy of the organization. Types Of Board Structures Depending on the type of directors on the board or their relation to title company board structures can be of four types. 17

All-Executive Board - An all-executive board does not have even one outside director i.e. every member on the board is also a member of the management. The responsibilities of the managers are spelt out in the contract of employment and labor law. All-executive boards are a common feature in many family owned business and completely owned subsidiary companies. This type of board structure is suitable for the above type of companies as there is no separation between the owner and the management. Since all the executive directors represent the owner of the company, his interests in the company are automatically safeguarded. In the case of a wholly-owned subsidiary company, the board functions as per the managerial policies and guidelines framed by the group's management. The effectiveness of this type of boards' comes into question when the family is directly involved in the management or the shareholdings are widely spread. Thus, such concerns raise the need for non-executive or outside directors to ensure better corporate governance. The performance of this type of board suffers when there is a shortage of talent internal to the organization for overseeing the governance of the company. To ensure better corporate governance, non-executive or outside directors are necessary. Majority Executive Board Executive directors have a majority on the board while outside or non-executive directors are in a minority. The non-executive directors are appointed to the board to represent the interests of stakeholder groups like major shareholders employees, customers etc. Sometimes, organizations appoint non-executive directors on the board to bring in the required expertise, knowledge and experience. The non-executive directors act as a check on the powers of the majority executive directors on the board. Ideally, there should be more than one non-executive director on the board to influence the decisions of the executive directors. It is conventional to have one-third of the seats on the board filled by non-executive directors; they put considerable pressure on board decisions by way of resignation if necessary. This type of board structure has come under criticism because the executive directors dominate the board. As a result, they may overlook some problems while evaluating their own performance. Some analysts feel that the board may end up as a battleground if each executive director starts arguing for more resources for his own department or division. The Majority outside Board This board has a majority of outside, non-executive directors. This type of board structure is common in companies that are quoted on the New York stock exchange. The degree of independence and the effectiveness of these outside directors is debatable. Most of these outside directors represent stakeholder groups like major stockholders, customers, supplier or creditors (banks) and other financial institutions. The effectiveness and independence of such directors is questionable since somehow related to the company and represent a vested interest in the company, directly or indirectly. Many regulatory agencies are making it mandatory for companies to have independent directors on the committees appointed by the board. Thus attempts are being made to ensure the independent assessment of the board's management decisions. Two-tier Supervisory Board This board addresses the concerns for separating the executive management from. non-executive directors. This structure has two separate boards: the non-executive supervisory board and the executive management board. The supervisory board monitors the plans and performances of the executive board. This supervisory board is also empowered to appoint the chief executive officer and, if necessary even fire him. This structure was first proposed by the European Community and was later adopted by the Germans. The two-tier boards in Germany had equal representation from labor and shareholder groups. Advisory Boards Some large companies that do business in many countries take the help of advisory boards to ensure better governance. The parent company selects a few experienced employees or others from foreign countries to advise them on issues relating to the business environment in these countries. This advisory board does not have any executive powers. < TOP > < TOP OF THE DOCUMENT >

18