8. Ethics Notes Extra 09

Elaborate Notes

Challenges Concerning Corporate Governance in India

Corporate Governance refers to the system of rules, practices, and processes by which a company is directed and controlled. Effective corporate governance balances the interests of a company’s many stakeholders, such as shareholders, senior management executives, customers, suppliers, financiers, the government, and the community. In India, despite significant reforms post-liberalization, several structural and ethical challenges persist.

• Dominance of Family-Controlled Businesses:

  • Issue: A significant portion of Indian businesses, including many listed on stock exchanges, remain under the control of founding families or promoters. This leads to a culture where board appointments are often influenced by personal relationships rather than professional merit. Friends and family members of promoters are frequently appointed to the board of directors, which can compromise objective decision-making and oversight.
  • Historical Context: The “promoter-driven” model of Indian enterprise has its roots in the post-independence “Licence Raj” era, where business houses were built on family capital and networks. This legacy continues, as seen in many large conglomerates.
  • Example: The disputes within the Ambani family (Reliance) or the tussle between Cyrus Mistry and the Tata Sons board highlighted the deep-seated influence of promoter families even in professionally managed conglomerates.
  • Succession Planning: The overwhelming influence of founders often leads to a failure in establishing a formal succession plan. This creates instability and uncertainty when the founder retires or is no longer able to lead. The transition is often ad-hoc and can lead to internal power struggles, affecting the company’s performance and shareholder value.
  • Proposed Resolution: A ranking system, as suggested, could create public and investor pressure on companies to diversify their boards. Such a system could assess boards on parameters like gender diversity, professional background, and independence from promoters. Globally, institutions like the Hampton-Alexander Review in the UK have successfully used public reporting to improve female representation on FTSE 350 boards.

• Compromise of Stakeholder Interests:

  • Issue: Corporate entities have often been found to prioritize the interests of a few powerful promoters or executives over those of minority shareholders, employees, and creditors. This creates a severe conflict of interest and erodes trust.
  • Example 1 (IL&FS Crisis, 2018): The board of Infrastructure Leasing & Financial Services (IL&FS) failed to raise alarms over hazardous financial practices, including taking on excessive debt and lending to its own subsidiaries. This lack of oversight and accountability ultimately led to a default cascade, impacting the entire financial market. The board’s inaction suggested a severe governance failure where the interests of key executives were protected over the financial health of the company and its investors.
  • Example 2 (ICICI-Videocon Case): The former CEO of ICICI Bank was accused of sanctioning loans to the Videocon Group in a quid pro quo arrangement, as her spouse had business dealings with the group’s promoter. This was a classic case of conflict of interest, where due diligence was allegedly bypassed for personal gain, jeopardizing the bank’s assets and violating the trust of its shareholders.
  • Proposed Resolution: Strict adherence to principles of transparency and accountability is crucial. This involves robust disclosure norms, empowered audit committees, and a culture where dissent and scrutiny are encouraged at the board level. The Companies Act, 2013 and SEBI’s Listing Obligations and Disclosure Requirements (LODR) Regulations, 2015 provide the legal framework, but their enforcement in spirit, not just letter, is paramount.

• Ineffectiveness of Independent Directors:

  • Issue: The concept of an ‘independent director’ was introduced to bring objectivity to board deliberations and act as a watchdog for shareholder interests. However, their independence is often compromised as they are appointed (and can be removed) by the promoters.
  • Scholarly View: Academics like Bala N. Balasubramanian have argued that in the context of promoter-dominated firms, the ‘independence’ of such directors is often nominal. They may hesitate to challenge the promoter’s decisions for fear of removal or non-reappointment.
  • Example: There have been instances where independent directors who raised pertinent questions or dissented with the promoter’s view were removed from the board through shareholder votes dominated by the promoter group.
  • Proposed Resolution: SEBI, under the recommendations of the Uday Kotak Committee on Corporate Governance (2017), has proposed strengthening the position of independent directors. This includes a “dual approval” mechanism for their removal, requiring a majority of minority shareholders to also vote in favour, thereby limiting the absolute power of promoters.

• Faulty Risk Management and Unfair Remuneration:

  • Issue: Poor investment decisions, often driven by the vested interests of top management or promoters, expose companies and their retail investors to significant financial risk. Simultaneously, senior executives are often awarded exorbitant remuneration packages that are not aligned with the company’s long-term performance or the interests of other stakeholders.
  • Example: The Kingfisher Airlines debacle, where massive loans were taken for ambitious expansion plans without a robust risk management framework, led to the company’s collapse, wiping out shareholder wealth and leaving banks with huge non-performing assets (NPAs).
  • Proposed Resolution: Companies need to establish robust risk management policies overseen by a dedicated board committee. Regarding remuneration, the Companies Act, 2013 mandates a ‘say on pay’ provision, where executive compensation policies require shareholder approval. This needs to be strengthened to ensure that remuneration is fair and linked to sustainable performance.

• Non-Compliance with Disclosure and Accountability Norms:

  • Issue: Failures in corporate governance are often rooted in a lack of transparent disclosures and accountability. This can range from minor non-compliance to major accounting fraud, where even the independence of statutory auditors is compromised.
  • Historical Context: The Satyam Computer Services scandal (2009), where the company’s founder admitted to manipulating accounts for years, was a watershed moment. It exposed a complete breakdown of oversight by the board, audit committee, and the company’s auditors (PricewaterhouseCoopers), leading to the enactment of stricter provisions in the Companies Act, 2013 and the establishment of the National Financial Reporting Authority (NFRA).
  • Proposed Resolution: Mandating the presence of the entire board of directors, especially the heads of key committees (Audit, Nomination and Remuneration), at Annual General Meetings (AGMs) is a vital step. This allows shareholders, including small retail investors, to directly question the board and hold them accountable for the company’s performance and governance practices.

Recommendations of Kotak Committee on Corporate Governance

The committee, chaired by Uday Kotak, was constituted by SEBI in 2017 to suggest improvements to corporate governance standards in India. Its report provided a comprehensive roadmap focusing on strengthening the “three gatekeepers” of governance: the Board of Directors, the Auditors, and the Regulators. Key recommendations included:

• Separating the roles of Chairperson (a non-executive position) and MD/CEO.
• Mandating at least one independent woman director on the board.
• Increasing the minimum number of board meetings per year.
• Expanding the role and eligibility criteria for the audit committee.
• Improving disclosures related to related-party transactions and auditor credentials.
• Strengthening the process for appointment and removal of independent directors.

Corporate Social Responsibility (CSR)

CSR is a management concept whereby companies integrate social and environmental concerns in their business operations and interactions with their stakeholders. It has evolved from mere philanthropy to a more integrated, strategic, and legally mandated concept in India.

• Beyond Philanthropy: The modern understanding of CSR extends beyond cheque-book charity. It encompasses:

  • Business Ethics and Compliance: Operating with integrity, adhering to all laws, and promoting a culture of ethical conduct internally.
  • Work-Life Balance: Creating a supportive work environment that values employee well-being, mental health, and personal time. This is increasingly seen as a core responsibility towards the ‘internal’ community of the company.
  • Ethical Supply Chains: Ensuring that suppliers and partners also adhere to ethical practices, including fair labour standards, human rights, and environmental protection. For instance, companies in the textile industry are pressured to ensure their suppliers do not use child labour.
  • Environmental Sustainability: Going beyond minimum legal compliance to proactively adopt green technologies, reduce carbon footprint, and conserve natural resources. ITC’s e-Choupal initiative is a classic example that combines community empowerment with sustainable agricultural practices.
  • Community Empowerment: Engaging with local communities to understand their needs and investing in projects that create sustainable livelihoods, improve infrastructure (schools, sanitation), and enhance quality of life. This shifts the focus from ‘giving’ to ‘enabling’.

• Legal Provisions under The Companies Act, 2013:

  • Section 135 of the Companies Act, 2013 made India one of the first countries to mandate CSR spending for qualifying companies.
  • Applicability Criteria: A company must engage in CSR if it meets any of the following during the immediately preceding financial year:
    1. Net worth of ₹500 crore or more.
    2. Annual turnover of ₹1000 crore or more.
    3. Net profit of ₹5 crore or more.
  • Mandates:
    1. CSR Committee: Must be formed with at least three directors, including at least one independent director.
    2. Spending Requirement: The company must spend at least 2% of its average net profits of the preceding three years on specified CSR activities.
    3. Reporting: The Board’s Report must include details about the CSR policy and its implementation. Initially, the approach was ‘comply or explain’, but recent amendments have made non-compliance a punishable offence.

Advantages of CSR Activities

CSR is not merely a cost but a strategic investment. It is founded on the principle that business and society are interdependent.

• Ethical and Moral Responsibility: A thriving business requires a stable, healthy, and educated community. Therefore, businesses have a moral obligation to contribute to the well-being of the society in which they operate. This view is articulated by scholars like R. Edward Freeman in his “Stakeholder Theory” (1984), which posits that a firm should create value for all stakeholders, not just shareholders.
• Nation Building: Through CSR, corporations can supplement government efforts in critical areas like education, healthcare, sanitation (Swachh Bharat Abhiyan), and skill development, thus playing a significant role in achieving national development goals like the Sustainable Development Goals (SDGs).

Challenges Associated with CSR in India

• Sectoral and Geographical Imbalance:
  • Data from the Ministry of Corporate Affairs has consistently shown that a majority of CSR funds are channelled into a few sectors like education and health. Other critical areas like environmental sustainability, conservation of national heritage, and gender equality receive significantly less attention.
  • Geographically, spending is heavily concentrated in industrialized states like Maharashtra, Gujarat, Karnataka, and Tamil Nadu, while states with lower Human Development Indices (HDIs) in the east and northeast receive a disproportionately small share, thus exacerbating regional inequalities.
• Compliance-Driven Approach: Many companies view the 2% mandate as a legal obligation or a corporate tax to be discharged, rather than an opportunity to create meaningful social impact. The focus is often on spending the money to avoid penalties, leading to poorly planned and hastily executed projects.
• Lack of Community Participation: Projects are often designed in corporate boardrooms with little to no consultation with the local communities they are meant to serve. This top-down approach can lead to projects that are not aligned with local needs or cultural contexts, resulting in low ownership and sustainability.
• Conflict of Interest: A significant concern is the practice of companies routing their CSR funds to foundations or NGOs run by the company’s own promoters or their relatives. This defeats the principle of arm’s-length philanthropy and raises questions about the end-use and actual impact of the funds.

Probity in Governance

Probity is the quality of having strong moral principles, integrity, uprightness, and honesty. In the context of governance, it signifies a commitment to uncompromised ethical conduct in all public actions and decisions.

• Definition and Core Principles: Probity is a cornerstone of good governance. It goes beyond the mere absence of corruption and encompasses:
  • Integrity: Adherence to a consistent moral and ethical code.
  • Transparency: Openness in decision-making processes.
  • Accountability: Being answerable for one’s actions and decisions.
  • Objectivity: Making decisions based on merit, without bias or prejudice.
  • These principles echo the Seven Principles of Public Life laid down by the Nolan Committee (1995) in the UK, which have become a global benchmark for ethical governance.
• Importance of Probity:
  1. Effective Resource Utilisation: Ensures that public funds are used for their intended purpose without leakage or misappropriation.
  2. Building Trust and Social Capital: Fosters public confidence in government institutions, which is essential for policy implementation and social cohesion.
  3. Fulfilling Societal Expectations: Citizens expect public officials to act in the public interest, and probity is the assurance of this commitment.
  4. Protecting the Marginalised: A system with high probity ensures that welfare schemes and benefits reach the most vulnerable sections of society.
  5. Establishing Model Institutions: Creates a benchmark for ethical conduct that inspires both the public and private sectors.
  6. Ensuring Citizen-Centricity: Shifts the focus of governance from being provider-centric to being responsive to the needs of citizens.
  7. Attracting Talent: A clean and ethical public sector is more likely to attract and retain honest and talented individuals.
• Measures to Inculcate Probity:
  1. Right to Information (RTI) Act, 2005: Effective implementation, including suo motu disclosures under Section 4, promotes transparency by making government functioning open to public scrutiny.
  2. Conflict of Interest Management: Training civil servants to identify, declare, and manage potential conflicts of interest is crucial for maintaining impartiality.
  3. Social Audit: A mechanism where the community itself audits the implementation of a program. Its successful use in schemes like the MGNREGA in states like Andhra Pradesh and Rajasthan has demonstrated its power in enhancing accountability.
  4. Autonomy of Investigative Agencies: Ensuring the functional independence of agencies like the Central Bureau of Investigation (CBI) and the Enforcement Directorate (ED) is vital for impartial investigation of corruption cases, especially those involving high-ranking officials. The Supreme Court’s judgement in the Vineet Narain case (1997) underscored this need.
  5. Deployment of Technology: E-governance, Direct Benefit Transfer (DBT), and Government e-Marketplace (GeM) reduce human discretion and opportunities for corruption, thereby enhancing transparency and efficiency.

Ethics in International Relations (IR)

Ethics in IR involves the application of moral principles to the foreign policy and interactions of states in the global arena. It addresses dilemmas concerning war, peace, human rights, global inequality, and environmental justice.

• Need for Ethics in IR:

  1. Anarchic World Order: In the absence of a supreme global authority (like a world government) to enforce laws, states often act in their own interest. Ethical principles provide a normative framework to guide state behaviour and foster cooperation.
  2. Transnational Global Issues: Challenges like terrorism, climate change, and pandemics do not respect national borders. Addressing them requires collective action rooted in shared ethical commitments, such as the principle of ‘Common but Differentiated Responsibilities and Respective Capabilities’ (CBDR-RC) in climate negotiations.
  3. Coordinated approach to Global Problems: Issues like poverty, hunger, organized crime, and drug trafficking cannot be solved by any single nation. An ethical approach based on global solidarity and shared responsibility is necessary for peaceful and effective resolutions.
  4. Wide Ramifications of Foreign Policy: The decisions made by powerful nations can have profound impacts on people in faraway lands (e.g., economic sanctions, military interventions). Ethical analysis is therefore essential to weigh the consequences of such actions on human lives.

• Major Approaches to Ethical Dilemmas in IR:

  • Realism:
    • Core Tenet: This is a dominant school of thought in IR. Realists argue that the international system is anarchic and the primary motivator for states is survival and the pursuit of national interest, defined in terms of power.
    • View on Morality: Morality and ethics are considered secondary, if not irrelevant, to foreign policy. A state’s first duty is to its own citizens, and leaders must do what is necessary to protect their state, even if it involves morally questionable actions.
    • Key Scholars: Thucydides (History of the Peloponnesian War), Niccolò Machiavelli (The Prince), and Hans Morgenthau (Politics Among Nations, 1948). Morgenthau famously argued that “international politics, like all politics, is a struggle for power.”
  • Idealism (or Liberalism):
    • Core Tenet: Idealists believe that foreign policy can and should be guided by ethical and moral principles. They emphasize the potential for cooperation, peace, and the promotion of universal values like human rights, democracy, and global justice.
    • View on Morality: The goals and means of foreign policy must be moral. Idealists advocate for the strengthening of international law and institutions (like the United Nations) to mediate disputes and prevent conflict.
    • Key Scholars/Proponents: Immanuel Kant (Perpetual Peace: A Philosophical Sketch), and Woodrow Wilson, whose “Fourteen Points” after World War I were a classic expression of idealist principles, advocating for self-determination and a League of Nations.
  • Principled Realism:
    • Core Tenet: This approach seeks a middle ground between the stark power politics of realism and the moral aspirations of idealism. It acknowledges that states pursue their national interests and that power is a crucial element of IR.
    • View on Morality: However, it also holds that these interests should be pursued in a manner consistent with fundamental moral values. It combines a realistic assessment of the world with an unapologetic defence of principles like freedom, democracy, and human dignity.
    • Example: India’s contemporary foreign policy can be seen as an example of principled realism. While it robustly pursues its strategic interests (realism), it does so within a framework of values like ‘Vasudhaiva Kutumbakam’ (the world is one family) and its role as a leader of the Global South (idealism). It balances its strategic autonomy with a commitment to a rules-based international order.

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Prelims Pointers

• Corporate Governance Scandals: IL&FS Crisis (2018), Satyam Scandal (2009), ICICI-Videocon Case.
• Corporate Governance Committees: Kumar Mangalam Birla Committee (1999), Narayana Murthy Committee (2003), Uday Kotak Committee (2017).
• Regulators: SEBI (Securities and Exchange Board of India) for listed companies; Ministry of Corporate Affairs for the Companies Act.
• NFRA: The National Financial Reporting Authority is an independent regulatory body to oversee the auditing profession and accounting standards in India, established under the Companies Act, 2013.
• CSR Thresholds (Companies Act, 2013, Section 135):
  • Net worth: ₹500 crore or more.
  • Turnover: ₹1000 crore or more.
  • Net profit: ₹5 crore or more.
• CSR Spending: At least 2% of the average net profits of the company made during the three immediately preceding financial years.
• CSR Committee: Requires 3 or more directors, with at least one independent director.
• Probity: Core principles include honesty, integrity, transparency, accountability, and objectivity.
• Nolan Committee (1995, UK): Established the Seven Principles of Public Life.
• Social Audit: An audit of a government program’s performance conducted by the community itself, not by government officials.
• IR Theory - Realism: Core concept is national interest and power. Key thinker: Hans Morgenthau.
• IR Theory - Idealism: Core concept is morality, peace, and human rights. Key proponent: Woodrow Wilson.
• IR Theory - Principled Realism: A combination of pursuing national interests based on power while upholding fundamental moral values.

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Mains Insights

Corporate Governance

• Shareholder vs. Stakeholder Debate: The challenges in Indian corporate governance highlight the tension between the ‘shareholder primacy’ model (maximizing profits for owners) and the ‘stakeholder theory’ (balancing the interests of all stakeholders). The promoter-driven culture in India often leads to a system where the interests of the promoter-shareholder override those of minority shareholders and other stakeholders, making a strong case for a stakeholder-centric governance framework.
• Cause-Effect Analysis: The root cause of many governance failures is the concentration of power in the hands of promoters. This leads to effects like weak boards, compromised independent directors, and related-party transactions that are detrimental to the company. Regulatory reforms (like those from the Kotak Committee) aim to break this cause-effect chain by distributing power more evenly and enhancing transparency.
• Effectiveness of Regulation: While India has a robust legal framework (Companies Act, SEBI LODR), the key challenge lies in enforcement. The Satyam and IL&FS crises occurred despite existing regulations. This points to the need for not just more rules, but also for strengthening the capacity and independence of regulatory bodies (SEBI, NFRA) and fostering an ethical corporate culture that values governance in spirit, not just for compliance.

Corporate Social Responsibility (CSR)

• Mandatory CSR: An Ethical Dilemma: Is mandatory CSR truly ethical, or is it just another form of corporate tax?
  • Argument For: It forces companies to acknowledge their societal obligations and channels much-needed private sector funds towards development. It institutionalizes social responsibility.
  • Argument Against: True ethics is voluntary. Mandating it can lead to a compliance-driven, “tick-box” mentality, stifling genuine philanthropic spirit and innovation in social projects. It may also give corporations a tool for “ethics-washing” or “greenwashing” their otherwise harmful business practices.
• From Compliance to Impact: The primary challenge for CSR in India is to move from a focus on expenditure to a focus on outcomes. This requires a paradigm shift:
  1. Need Assessment: Companies should conduct thorough needs assessments in collaboration with local communities.
  2. Impact Measurement: Developing robust metrics to measure the social return on investment (SROI) of CSR projects.
  3. Strategic Alignment: Aligning CSR activities with the company’s core competencies and national priorities like the SDGs can create more sustainable and impactful outcomes.

Probity in Governance

• Probity as a Foundational Value: Probity is not just about preventing corruption; it is a prerequisite for achieving ‘Good Governance’ and building ‘social capital’. When citizens trust their government to be fair and honest, they are more likely to comply with laws, pay taxes, and participate in development. It is the bedrock upon which the social contract between the state and its citizens rests.
• Challenges to Inculcating Probity:
  1. Political Interference: The lack of autonomy for investigative agencies and the politicization of the bureaucracy undermine probity.
  2. Culture of Impunity: A slow judicial process and lack of exemplary punishment for the corrupt create a belief that one can get away with unethical behaviour.
  3. Discretionary Powers: Vague rules and high levels of discretion vested in officials create opportunities for rent-seeking. Technology and rule-based governance (e-governance) are key solutions here.
• Link with GS Paper II (Governance): Measures to ensure probity, such as RTI, social audits, citizen charters, and the Lokpal, are central themes in the Governance syllabus. An ethical perspective from GS-IV adds depth to these topics.

Ethics in International Relations

• Historiographical Viewpoint: India’s Foreign Policy: India’s foreign policy journey can be analyzed through these ethical lenses:
  • Post-Independence (Nehruvian Era): Dominated by Idealism. The policy of Non-Alignment and the Panchsheel principles were rooted in a moralistic vision of a post-colonial world order based on peace and sovereign equality.
  • Post-1971 & Cold War Peak: A shift towards Realism. The security environment, wars with China and Pakistan, and the nuclear threat necessitated a more pragmatic, power-oriented approach, culminating in the 1974 and 1998 nuclear tests.
  • Contemporary Era: A blend described as ‘Principled Realism’ or ‘Strategic Autonomy’. India navigates a multi-polar world by forming issue-based coalitions (e.g., Quad for security, BRICS for economic cooperation) while championing values like democracy and a rules-based order.
• Ethical Dilemmas in Modern Diplomacy:
  • Refugee Crisis: The dilemma between the realist principle of national security/sovereignty and the idealist principle of humanitarian responsibility (e.g., India’s stance on Rohingya refugees).
  • Climate Change: The conflict between the national interest of rapid economic development and the global ethical responsibility to reduce carbon emissions, encapsulated in the debate over ‘common but differentiated responsibilities’.
  • Trade vs. Human Rights: The dilemma of whether to engage in trade with nations that have poor human rights records, balancing economic interests against moral principles.