BUSINESS ETHICS IN INTERNATIONAL BUSINESS

MODULE II: Corporate Governance in Business

Reference: Business Ethics and Corporate Governance — B.N. Ghosh
Weightage: 25% | 8 Subtopics | 10 Points Each

📌 1. Corporate Governance: Concept, Need to Improve Standards &

Features of Good Governance
1. Meaning of Corporate Governance: Corporate governance is the system of rules, practices, and
processes by which a company is directed and controlled, balancing the interests of stakeholders
such as shareholders, management, customers, and regulators.
2. Origin and Evolution: The concept gained prominence after major corporate scandals (Enron,
WorldCom) in the early 2000s — these failures exposed how unchecked managerial power leads to
fraud, necessitating structured governance frameworks.
3. Principal-Agent Problem: Corporate governance primarily addresses the principal-agent conflict —
where managers (agents) may pursue personal interests at the expense of shareholders
(principals) — through accountability mechanisms like board oversight.
4. Need: Protecting Shareholder Interests: Good governance protects minority shareholders from
exploitation by majority shareholders or self-serving management — ensuring fair returns and
transparency in the use of invested capital.
5. Need: Preventing Corporate Fraud: Weak governance enables financial manipulation, insider
trading, and misreporting — strong governance standards act as a deterrent by ensuring
independent audits, disclosures, and board oversight.
6. Need: Enhancing Investor Confidence: Countries and firms with robust governance attract more
domestic and foreign investment — investors pay a premium for well-governed companies because
the risk of value destruction by management is lower.
7. Feature: Transparency: Good governance requires full and timely disclosure of financial and
operational information — transparency reduces information asymmetry between management and
stakeholders, enabling informed decision-making.
8. Feature: Accountability: Every decision-maker in the firm must be answerable for their actions —
accountability mechanisms include board committees, external auditors, regulatory filings, and
AGMs (Annual General Meetings).
9. Feature: Fairness and Equitability: Good governance ensures all stakeholders — including
minority shareholders, employees, and creditors — are treated fairly and that no group is
systematically disadvantaged by the firm's policies.
10. Feature: Responsibility and Independence: The board of directors must act independently of
management, take responsibility for strategic oversight, and ensure the firm's long-term
sustainability rather than focusing solely on short-term profits.

📌 2. Corporate Governance: The International Perspective on Ownership

and Rights & Responsibilities of Share Ownership
1. Dispersed vs. Concentrated Ownership: Anglo-American firms typically have dispersed
shareholding (many small shareholders), while German, Japanese, and Indian firms often have
concentrated ownership (family or institutional blocks) — each model creates different governance
challenges.
2. Rights of Shareholders: Shareholders globally are entitled to core rights: voting at general
meetings, receiving dividends, access to company information, participation in major decisions, and
the right to transfer shares freely.
3. Responsibilities of Shareholders: Shareholders are not merely passive recipients — they have a
responsibility to exercise their votes, engage with management on governance issues, and hold
boards accountable for long-term value creation.
4. Institutional Investors as Governance Actors: Pension funds, mutual funds, and insurance
companies are major institutional shareholders globally — their active engagement in governance
(proxy voting, shareholder resolutions) is critical for market-wide governance standards.
5. Family-Owned Businesses: Governance Challenges: In many emerging markets (including
India), family-controlled firms dominate — while this provides stability, it can lead to entrenchment
of family interests over minority shareholders, requiring special governance safeguards.
6. Cross-Shareholding and Keiretsu Model: Japan's keiretsu system involves firms holding shares in
each other, creating stable long-term relationships — while this reduces hostile takeover risk, it can
reduce accountability and entrench underperforming management.
7. State-Owned Enterprises (SOEs) Governance: Government-owned firms face unique governance
challenges — political interference, social mandates conflicting with profitability, and lack of market
discipline require special governance frameworks as recommended by the OECD.
8. Shareholder Activism: Activist shareholders use their ownership rights to pressure boards for
strategic changes — this is increasingly common globally and represents a market-driven
mechanism for improving governance quality.
9. International Variation in Shareholder Rights: Legal protections for shareholders vary significantly
across countries — countries with common law traditions (UK, India, USA) generally offer stronger
minority shareholder protections than civil law countries.
10. One Share, One Vote Principle: The principle that voting rights should be proportional to
economic ownership is a cornerstone of fair governance — dual-class share structures that give
founders disproportionate control are a contested governance issue globally.

📌 3. Shareholder Representatives: Non-Executive and Independent

Directors
1. Role of the Board of Directors: The board is the apex governance body responsible for setting
strategy, overseeing management, protecting shareholder interests, and ensuring the firm's long-
term health — it acts as the critical link between ownership and management.
2. Executive vs. Non-Executive Directors: Executive directors are full-time employees (e.g., CEO,
CFO) involved in day-to-day management; non-executive directors (NEDs) are part-time board
members who provide independent oversight, strategic advice, and challenge management
decisions.
3. Importance of Independent Directors: Independent directors have no financial or personal
relationship with the company — their independence is essential for objective oversight, especially
on sensitive issues like executive compensation, related-party transactions, and audit quality.
4. SEBI and Indian Requirements: In India, SEBI's Listing Obligations and Disclosure Requirements
(LODR) regulations (strengthened by the Kotak Committee) mandate that at least one-third of the
board be independent directors, with at least one woman director.
5. Audit Committee: A key board committee comprising independent directors, the audit committee
oversees financial reporting, internal controls, and external auditor independence — it is the primary
safeguard against financial fraud and misreporting.
6. Nomination and Remuneration Committee: This committee, led by independent directors,
determines the criteria for board appointments and sets executive pay — it prevents excessive
compensation packages that misalign management incentives with shareholder interests.
7. Challenges to Director Independence: True independence is often compromised in practice —
directors may be friends of the promoter, dependent on board fees, or reluctant to challenge
management for fear of non-renewal, making formal independence criteria insufficient.
8. Director Training and Competence: BN Ghosh stresses that NEDs must have relevant expertise
— sector knowledge, financial literacy, and legal understanding — as uninformed directors cannot
effectively challenge management or guide strategy.
9. Liability of Independent Directors: Post the IL&FS and other corporate failures in India, the liability
of independent directors came under scrutiny — the Companies Act 2013 holds all directors
including NEDs responsible for governance failures unless they can demonstrate due diligence.
10. Global Best Practices: The UK Corporate Governance Code, NYSE listing standards, and OECD
Principles all emphasise board independence — global best practice recommends that a majority of
board members be independent, with clearly defined roles and annual performance evaluations.

📌 4. International Corporate Governance Framework: Global & Local

Agencies Providing Leadership and Guidance
1. Need for International Frameworks: As businesses operate across borders, purely domestic
governance rules are insufficient — international frameworks ensure a common minimum standard
that protects investors and stakeholders regardless of where a company operates.
2. OECD Principles of Corporate Governance: First published in 1999 and revised in 2004 and 2015,
the OECD Principles cover shareholder rights, equitable treatment, role of stakeholders, disclosure,
and board responsibilities — they are the global benchmark for governance standards.
3. The World Bank and IFC: The World Bank's Corporate Governance team and the International
Finance Corporation (IFC) actively promote governance reforms in developing countries — they link
access to funding with adoption of good governance practices.
4. Basel Committee on Banking Supervision (BCBS): The BIS/Basel Committee sets governance
principles specifically for banks — covering risk management, internal controls, and board
competence in financial institutions whose failure can trigger systemic crises.
5. International Organisation of Securities Commissions (IOSCO): IOSCO coordinates securities
regulation globally and sets standards for disclosure, market integrity, and investor protection — its
principles guide national securities regulators like SEBI (India) and SEC (USA).
6. Local Regulatory Bodies: SEBI in India: SEBI is India's primary capital market regulator — it
enforces governance norms for listed companies through LODR regulations, mandatory
disclosures, insider trading rules, and continuous disclosure requirements.
7. Ministry of Corporate Affairs (MCA) and Companies Act 2013: India's Companies Act 2013
(administered by MCA) is the primary legislation governing corporate governance for all registered
companies — it covers board composition, auditor independence, CSR obligations, and related-
party transactions.
8. Stock Exchanges as Governance Enforcers: Stock exchanges (BSE, NSE, NYSE, LSE) enforce
governance as a listing condition — non-compliant companies face delisting, fines, and public
censure, creating strong market-based incentives for governance compliance.
9. Corporate Governance Codes: Comply or Explain: Many countries (UK, Germany, Japan) follow
a 'comply or explain' model — companies either comply with governance codes or publicly explain
why they have not, giving flexibility while maintaining transparency.
10. Role of Credit Rating Agencies: Agencies like Moody's, S&P, and CRISIL factor governance
quality into credit ratings — poor governance signals higher default risk, increasing the cost of
capital and creating a market-based incentive for improved governance.

📌 5. International Corporate Governance: OECD and BIS Principles,

Implementation and Pitfalls
1. OECD Principle I: Effective Framework: The governance framework must promote transparent
and efficient markets, be consistent with the rule of law, and clearly articulate the division of
responsibilities among supervisory, regulatory, and enforcement authorities.
2. OECD Principle II: Shareholder Rights: Shareholders must have the right to vote, participate in
AGMs, receive dividends, and be protected against abusive self-dealing — the OECD emphasises
that these rights must be effectively exercisable, not merely theoretical.
3. OECD Principle III: Equitable Treatment: All shareholders — including minority and foreign
shareholders — must be treated equitably. Insider trading and abusive self-dealing must be
prohibited, and shareholders must have access to effective legal redress.
4. OECD Principle IV: Role of Stakeholders: Good governance recognises the rights of stakeholders
(employees, creditors, communities) established by law or mutual agreement — firms should create
wealth and jobs while maintaining financial sustainability.
5. OECD Principle V: Disclosure and Transparency: Companies must disclose material information
on financial results, ownership structure, board composition, governance policies, and risk factors
— timely and accurate disclosure is the lifeblood of investor confidence.
6. OECD Principle VI: Board Responsibilities: The board must guide corporate strategy, monitor
management, ensure integrity of financial reporting, and be accountable to the company and
shareholders — board members must act with full information and in good faith.
7. BIS/Basel Principles for Banks: The Basel Committee's governance principles for banks
emphasise: active board oversight, senior management accountability, robust risk management
functions, and effective internal controls — recognising that bank failures have systemic
consequences.
8. Implementation Challenges: A major pitfall is the gap between formal adoption of OECD/BIS
principles and actual implementation — in many countries, rules exist on paper but enforcement is
weak due to regulatory capture, corruption, or lack of judicial efficiency.
9. Transplantation Problem: BN Ghosh highlights the 'transplantation problem' — blindly copying
Western governance models without adapting them to local ownership structures, legal traditions,
and cultural norms often results in dysfunctional governance.
10. Evaluation and Reform: Periodic governance reviews (e.g., OECD's own reviews and IMF FSAP
assessments) help identify gaps and drive reforms — continuous evaluation rather than one-time
adoption is essential for governance frameworks to remain effective.
📌 6. Changing World for Companies: International Aspects of Corporate
Social Responsibility (CSR)
1. Evolution of CSR in International Business: CSR has evolved from voluntary philanthropy to a
strategic business imperative — international pressure from consumers, investors, NGOs, and
regulators now makes CSR a core component of global business strategy.
2. Carroll's CSR Pyramid: BN Ghosh references Carroll's four-level pyramid: economic responsibilities
(be profitable), legal responsibilities (obey the law), ethical responsibilities (be ethical), and
philanthropic responsibilities (be a good corporate citizen).
3. CSR in Global Supply Chains: International CSR now extends beyond the firm itself — MNCs are
expected to ensure fair labour practices, safe working conditions, and environmental standards
throughout their global supply chains, even among third-party suppliers.
4. Mandatory CSR: India's Unique Model: India's Companies Act 2013 mandates that firms with a net
worth of ₹500 crore or more, or turnover of ₹1000 crore or more, spend 2% of average net profits
on CSR activities — making India one of the few countries with legally mandated CSR.
5. CSR and the Sustainable Development Goals (SDGs): The UN SDGs provide a global framework
that aligns CSR activities with global priorities — firms that anchor their CSR to SDGs gain
international recognition and credibility while contributing to measurable development outcomes.
6. Environmental CSR: Climate Responsibility: Climate change has made environmental CSR non-
negotiable — firms face pressure to reduce carbon footprints, adopt renewable energy, disclose
climate risks (TCFD framework), and transition to net-zero business models.
7. Social CSR: Labour and Community: International CSR standards (SA8000, ILO conventions)
require firms to uphold worker rights, eliminate discrimination, ensure occupational safety, and
invest in community development — especially in developing countries where local laws may be
weaker.
8. CSR Reporting and GRI Standards: The Global Reporting Initiative (GRI) Standards are the
world's most widely used framework for sustainability reporting — transparent CSR reporting allows
stakeholders to assess performance and holds firms accountable for stated commitments.
9. Strategic vs. Philanthropic CSR: Porter and Kramer's 'Creating Shared Value' concept (endorsed
by Ghosh) argues that the most effective CSR is strategically aligned with the firm's core business
— not merely charitable donations that are disconnected from operations.
10. Challenges: Greenwashing and CSR Washing: A key challenge in international CSR is the
proliferation of misleading claims — firms that project ethical images without substantive action
('CSR washing') undermine trust and create a 'market for lemons' where genuine CSR is not
rewarded.

📌 7. Business Ethics and Corporate Governance: International

Experience, Indian Experience & Kotak Committee Recommendations
1. International Experience: The US Post-Enron: The Enron and WorldCom scandals (2001-02)
triggered the Sarbanes-Oxley Act (SOX) in the USA — SOX introduced stringent requirements on
CEO/CFO certification of accounts, auditor independence, and internal control disclosures.
2. International Experience: UK Cadbury Report: The UK's Cadbury Report (1992) was the world's
first comprehensive corporate governance code — it introduced the 'comply or explain' principle
and recommended separation of CEO and Chairman roles, influencing governance reforms
globally.
3. International Experience: Germany's Two-Tier Board: Germany's co-determination model
features a two-tier board (supervisory board with employee representatives + management board)
— this stakeholder-inclusive model is contrasted with the Anglo-American single-tier shareholder-
focused board.
4. Indian Experience: The Kumar Mangalam Birla Report (2000): SEBI's first major governance
initiative, this report introduced mandatory audit committees, disclosure norms, and minimum
independent director requirements for listed companies in India — the foundation of India's
governance framework.
5. Indian Experience: Clause 49 and LODR: Clause 49 of the Listing Agreement (now replaced by
SEBI LODR 2015) formalised governance requirements for listed companies in India — covering
board composition, CEO/CFO certification, and related-party disclosures.
6. Major Indian Governance Failures: Cases like Satyam Computers (2009) — where the promoter
fabricated ₹7,000 crore in cash — exposed severe governance weaknesses in India: rubber-stamp
boards, compliant auditors, and inactive independent directors.
7. Kotak Committee (2017): Background: SEBI appointed the Uday Kotak-led Committee on
Corporate Governance in 2017 to review and strengthen listed company governance in India —
triggered by concerns about board effectiveness, promoter dominance, and disclosure quality.
8. Kotak Committee: Key Recommendations: Major recommendations included: reducing the
maximum number of directorships, mandatory separation of Chairman and MD/CEO roles,
enhanced disclosure of related-party transactions, at least 6 independent directors for top 500
companies, and compulsory webcast of AGMs.
9. Kotak Committee: Women's Representation: The committee recommended at least one
independent woman director (not just any woman) on the boards of the top 500 listed companies —
addressing the tokenism of appointing family members as women directors to meet formal
requirements.
10. Convergence of International and Indian Norms: BN Ghosh observes a gradual convergence
between Indian and international governance standards — India's adoption of IFRS-aligned
accounting standards, SEBI's alignment with IOSCO principles, and integration of ESG norms
reflect this global harmonisation.

📌 8. UN Global Compact
1. Origin and Purpose: The UN Global Compact was launched by Secretary-General Kofi Annan in
2000 — it is the world's largest corporate sustainability initiative, calling on businesses to align
strategies with universal principles on human rights, labour, environment, and anti-corruption.
2. The Ten Principles: The Compact's ten principles are derived from: the Universal Declaration of
Human Rights, the ILO's Declaration on Fundamental Principles, the Rio Declaration on
Environment and Development, and the UN Convention Against Corruption.
3. Human Rights Principles (1-2): Principle 1 requires businesses to support and respect
internationally proclaimed human rights; Principle 2 requires them to ensure they are not complicit
in human rights abuses — including those committed by governments in countries where they
operate.
4. Labour Principles (3-6): These principles uphold freedom of association and collective bargaining,
elimination of forced and compulsory labour, abolition of child labour, and elimination of
employment discrimination — applying ILO core conventions to business conduct globally.
5. Environmental Principles (7-9): Businesses are asked to support a precautionary approach to
environmental challenges (Principle 7), undertake initiatives to promote greater environmental
 responsibility (Principle 8), and encourage the development of environmentally friendly technologies
(Principle 9).
6. Anti-Corruption Principle (10): Added in 2004, Principle 10 requires businesses to work against
corruption in all its forms, including extortion and bribery — recognising that corruption undermines
all other sustainability efforts and distorts markets.
7. Communication on Progress (COP): Participating companies must submit an annual
Communication on Progress (COP) to the UN Global Compact — reporting on how they are
implementing the ten principles. Failure to submit leads to delisting from the Compact.
8. Global Compact and SDGs: The UN Global Compact explicitly links its ten principles to the 17
Sustainable Development Goals (SDGs) — providing businesses with a practical framework to
contribute to global development while managing their own sustainability risks.
9. Criticism: Voluntary and Toothless?: A major criticism of the Global Compact is that it is entirely
voluntary with no enforcement mechanism — 'bluewashing' (using the UN logo without substantive
commitment) allows firms to gain reputational benefits without genuine ethical reform.
10. Relevance for Indian Businesses: Over 400 Indian companies are participants in the UN Global
Compact — for Indian MNCs expanding globally, adherence to the Compact's principles signals
commitment to international ethical standards and improves access to global markets and ethical
investors.

Notes compiled from: Business Ethics and Corporate Governance — B.N. Ghosh | Module II