Economic Slowdown, Business Ethics and Corporate Governance

Economic Slowdown, Business Ethics & Corporate Governance

Everyone is talking about an economic slowdown, credit crunch and lack of investments. Various options and measures are suggested by experts. The role of government and financial institutions are also under the public lens. Business decisions can go wrong in the real world. We all must appreciate this fact. What about fund diversion, related party transactions at higher than market rates, manipulation of balance sheets to seek funds from banks, under-invoicing and over-invoicing to avoid taxes, fake bills to claim GST refunds, key management persons from the same family to ensure manipulations go un-noticed to the outside world, abusing the bargaining power against smaller vendors after using their services and products and putting their existence at risk and forcing bankruptcy and unemployment due to non-payment to vendors, are many such examples which clearly indicates that ethics and governance are compromised in most organisations. These are bigger contributing factors in the economic slowdown in India. The global slowdown is just one of the factor.

As a Public Interest Director on MII and Independent Director on the board of several financial institutions, I would like to pose one simple question to the readers in general. Why is there no aggressive and serious discussion in industry and trade associations, bodies and forums about corporate ethics and corporate governance?

Can Privatization Solve the Problem?
The answer is NO. There is no scam where there is no private entity. The issue is of ethics and governance, not who is the shareholder.

Who should be held accountable for large-scale mismanagement which is creating NPAs in India? 
Why no action is being initiated by the industry bodies and associations when large amounts of money are siphoned off by the promoters of the companies in violation of our National laws? What steps have been taken industry bodies so far to stop this behaviour of these promotors? Is there any checklist or code of conduct to be followed by our Industry bodies to discourage promoters indulging in such unethical practices? Can the leading industry bodies afford to remain as mute spectators when because of a few black sheeps other good corporate members of the association are put to trouble and country into economic crisis?

These are innumerable questions which need to be addressed. The industry engaging in lip service and simply passing on the buck to government agencies for enforcement is not the right approach. It has to wake up and put the house in order first, as more than the Government, it is their responsibility to facilitate and encourage good Corporate Governance among its association members. The media has an equally important role to play in the betterment of corporate governance in the country. But this can only be achieved when they rise above their fear of losing their unethical sponsors and advertisers and highlight these issues to build social pressure. This will help the good members of the industry gain confidence and deter the lawbreakers from practising unethical ways.

It is high time that all industry and trade bodies together proactively draft code of ethics and code of conduct for its members. All members should be a signatory to it and should also abide by the rules made. These code of conduct should be mandatorily pasted in the member company boardrooms and the rooms of all HODs, canteens and reception etc. to remind them of their responsibility and good ethics to be followed.

As a member of civil society, we must spread awareness and educate our citizens to demand good corporate governance. The role of industry bodies should also be to ensure transparency in the corporate governance system to generate trust and faith among financial investors and banking institutions. This in turn, will also help attract more talents in today's competitive global economy. By Rule of Law it should be made mandatory that no government department shall extend taxpayers' money in any form to any industry or trade association as sponsorship, if these bodies do not enforce code of Ethics and Code of Conduct on their members.

Expected Business Ethics in the Corporate world

Business ethics is the study of proper business policies and practices about potentially controversial subjects including corporate governance, insider trading, bribery, discrimination, corporate social responsibility, and fiduciary responsibilities. The law often guides business ethics, but at other times business ethics lays down a basic guideline that businesses can choose to follow to gain public approval. Business ethics also refers to implementing proper business policies and practices about arguably controversial subjects. The law usually sets the tone for business ethics, providing a basic guideline but implementation of these guidelines is the crucial part and it is here where the role of industry and trade bodies are required.

Understanding Business Ethics in today’s context

Business ethics make sure that a certain basic level of trust exists between stakeholders including consumers and various forms of market participants with businesses. For example, a fund manager must give the same consideration to the portfolios of family members and small investors what he is giving to the large corporates. Large companies must treat the small companies and suppliers at par with what they expect from large clients and suppliers. These kinds of practices make sure the public receives fair treatment. But the question is are we doing it? Is it fair when a large company does not pay the dues of Small companies for an extended time by giving excuses under one pretext or the other?

Business Ethics will drive the business in the coming days:

The concept of business ethics began in the 1960s as corporations became more aware of a rising consumer-based society that showed concerns about the environment, social causes, and corporate responsibility. The increased focus on so-called social issues was a hallmark of the decade.

Since that time, the concept of business ethics has evolved. Business ethics goes beyond just a moral code of right and wrong; it attempts to reconcile what companies must do legally versus maintaining a competitive advantage over other businesses. Firms display business ethics in several ways. Business ethics are meant to ensure a certain level of trust between consumers and corporations, guaranteeing the public fair and equal treatment.

The spread of internet and information exchange among civil society will make sure that bad companies and bad behaviours do not get consumer and regulatory support.

Examples of Business Ethics

Food Adulteration, misleading claims and advertisements, wrong labelling, delivering a defective product to consumers, cheating banks and business partners by giving fake reports and documents, not honouring the signed contract is a very common example where ethics are compromised to gain market share or to improve profitability or to exploit small vendors by arm twisting methods.

How the Board of Directors must handle these situations?

When it comes to preventing unethical behaviour and repairing its negative side effects, companies often look to managers and employees to report any incidents they see or experience. However, barriers within the company culture including the role of key management persons and promoters itself can prevent this from happening due to fear of retaliation for reporting misconduct.

According to the Global Business Ethics Survey of 2019 surveyed over 18,000 employees in 18 countries about different types of misconduct they observed in the workplace. Thirty per cent of the employees surveyed said they had observed misconduct, with 21% saying they had observed conduct they would categorize as abusive, intimidating, or creating a hostile work environment. Sixty-five per cent of employees said they reported the misconduct they observed. When questioned if they had experienced retaliation for reporting, 40% said they had been retaliated against.

Indeed, fear of retaliation is one of the major reasons employees cite for not reporting unethical behaviour in the workplace. ECI says companies should work toward improving their corporate culture by reinforcing the idea that reporting suspected misconduct is beneficial to the company and acknowledging and rewarding the employee's courage for making the report.

Encouraging good behaviour within the company is the fundamental spirit of corporate governance. Compliance to the rules and law under compulsion cannot ensure Good corporate governance, it is mere lip service.

It is up to the Board to see whether the top management is just doing lip service or keen to encourage ethical behaviour and transparency within the organization.

Unless we address the issues of corporate governance and unethical behaviour between various stakeholders mainly bankers, policymakers, corporates and consumers, the economic slowdown will take a long time to recover and in this process, many companies will gradually vanish and the society will suffer. Industry and trade associations can act as catalysts in faster recovery by pushing better corporate governance goals among their members.

I repeat, it is time that all industry and trade bodies must proactively draft code of ethics and code of conduct for all members and all members must sign it and paste the same in their boardrooms and the rooms of all HODs, canteens and reception etc. the way they paste their photos with political leaders and awards. 

Media must also highlight the achievements of good and ethical companies and discourage bad behaviour by exposing them to societies and in the financial world. This will help to promote and protect companies with good corporates governance track record.

In coming articles, we will share how to enhance Corporate Governance and Ethical Corporate behaviour and enjoy greater financial performance.

About the Authors:

• Mr. Vijay Sardana, Advocate Delhi High Court & Member-CDAC, SEBI
• Ms Priyanka Sardana, Advocate, Supreme Court of India
• Ms. Aastha Sardana, Researcher on Legal & Business matters

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