UNIT – 2

Ethics in Marketing, Finance and HRM

2.1 Ethics in Marketing:

One of the most effective ways to improve your marketing strategy is to consistently abide by certain ethical principles. Some marketing strategies may be able to draw in customers by using shady practices (such as spamming, which no one appreciates) – but the cost here is serious.

By using shady marketing tactics, you damage the long-term reputation of the company. Brand image is not something to be taken lightly, as it drives loyal customers.

If you focus on ethical marketing instead, you will be able to maximise customer satisfaction and maintain consumer trust and brand credibility.

Ethical marketing should always aim to be honest and fair. Unethical practices will not guarantee you more sales or necessarily cut costs in the long-term. What it does do, though, is put your company’s viability at risk.

Ethical marketing, on the other hand, is always the wisest route to success.

2.1.1 Ethical issues in Marketing Mix

Ethical issues in marketing arise from the conflicts and lack of agreement on particular issues. Parties involved in marketing transactions have a set of expectations about how the business relationships will take shape and how various transactions need to be conducted. Each marketing concept has its own ethical issues, which we will discuss in this chapter.

Market research has experienced a resurgence with the widespread use of the Internet and the popularity of social networking. It is easier than ever before for companies to connect directly with customers and collect individual information that goes into a computer database to be matched with other pieces of data collected during unrelated transactions.

The way a company conducts its market research these days can have serious ethical repercussions, affecting the lives of consumers in ways that have yet to be fully understood. Further, companies can be faced with a public backlash if their market research practices are perceived as unethical.

Unethical practices in marketing can result in grouping the audience into various segments. Selective marketing may be used to discourage the demand arising from these so-called undesirable market segments or to disenfranchise them totally.

Examples of unethical market exclusion may include the industry attitudes towards the gay, ethnic minority, and plus-size groups.

Ethics in Advertising and Promotion

In the early days of existence of corporations, especially during 1940s and 1950s, tobacco was advertised as a substance that promotes health. Of late, an advertiser who does not meet the ethical standards is considered an offender against morality by the law.

• Sexuality is a major point of discussion when ethical issues in advertising content are considered. Violence is also an important ethical issue in advertising, especially where children should not be affected by the content.
• Some select types of advertising may strongly offend some groups of people even when they are of strong interest to others. Female hygiene products as well as hemorrhoid and constipation medication are good examples. The advertisements of condoms are important in the interest of AIDS-prevention but are sometimes seen by some as a method of promoting promiscuity that is undesirable and strongly condemned in various societies.
• A negative advertising policy lets the advertiser highlight various disadvantages of the competitors’ products rather than showing the inherent advantages of their own products or services. Such policies are rampant in political advertising.

Delivery Channels

Direct marketing is one of the most controversial methods of advertising channels, especially when the approaches included are unsolicited.

Some common examples include TV and Telephonic commercials and the direct mail. Electronic spam and telemarketing also push the limits of ethical standards and legality in a strong manner.

Deceptive Marketing Policies and Ethics

Deceptive marketing policies are not contained in a specific limit or to one target market, and it can sometimes go unseen by the public. There are numerous methods of deceptive marketing. It can be presented to consumers in various forms; one of the methods is one that is accomplished via the use of humor. Humor offers an escape or relief from various types of human constraints, and some advertisers may take the advantage of this by applying deceptive advertising methods for a product that can potentially harm or alleviate the constraints using humor.

Anti-Competitive Practices

There are various methods that are anti-competitive. For example, bait and switch is a type of fraud where customers are "baited" through the advertisements for some products or services that have a low price; however, the customers find in reality that the advertised good is unavailable and they are "switched" towards a product that is costlier and was not intended in the advertisements.

Another type of anti-competitive policy is planned obsolescence. It is a method of designing a particular product having a limited useful life. It will become non-functional or out of fashion after a certain period and thereby lets the consumer to purchase another product again.

2.1.2 Unethical Marketing Practices in India

Ethical issue in adverting has become debatable question. Ethical advertising uses the truth to deceive the public. Today advertising industry has been facing criticism as the advertisement which is being telecasted does not follow norms of ethics. Some people describe it as false, unlawful, and untrue. Today, an advertisement industry faces lot of criticism which does not follow norms of ethics.

Vulgarity: Advertisements that are specifically pinned pointed for being inappropriate by almost all audiences. In the new era of television the commercials of televisions have also changed, certain companies often show vulgar ads regarding their products to attract more consumers and thus do a cheap promotion of their products. Some advertisements are related to deodorants and toothpastes.

Deception: It is a false advertisement which uses misleading, false or unproven information to advertise products to consumers. Duracell ultra-power batteries are a form of deceptive advertisement.

Puffery: It includes promotional material that makes boastful statements about a product or service. It is basically used by the business in order to rise up the image of the products.

Red Bull: The famous energy drink Red bull shows in advertisement that after drinking it gives you wings but we actually knows that it does not grows wings on your back after drinking it.

Axe Deodorant: Axe deodorant (chocolate fragrant) ad which shows that after spraying it that whole body turns to chocolate which is practically not at all possible.

Stereotypes: It is a readymade image of a person or relationship that is easily recognizable. The famous washing powders like Rin, Tide, wheel etc. and Wild stone fragrance do always uses a women in order to promote their brands. When characters have been shown in occupational roles, men generally work outside the home, and women are in domestic roles such as parent, spouse, or homemaker. These ads promote stereotypes of women and girls as softer, weaker, and more passive by means of a less active pace, more fades and resolves, and softer background music. In addition, boys and girls typically represent different personal and social characteristics, with boys being more autonomous, and aggressive.

Controversial advertising: Controversial advertising are those which violates norms for social value and personal ideals. It is designed to break through the advertising cluster to capture attention and create buzz and also to attract an audience. Controversial cases can be seen in Amul Macho TV commercial

Surrogate advertising: It is form of advertising which is used to promote banned products like cigarettes and alcohol, in the disguise of another product. IPL was one of the greatest brands which used kingfishers to promote initiatives.

Comparative advertising: Comparative ads are those which involve names of competitors in an ads and comparing one and more attributes by an advertising. The famous controversial advertisements were Cherry blossom Vs kiwi, Colgate Vs Pepsodent. One of the famous controversial comparative advertisements was Rin and Tide Natural where in the ad of Rin it directly showed the competitor product Tide and committed that it is a better and superior washing powder then that. Another controversial comparative advertisements were Colgate and pepsodent where pepsodent claimed directly that pepsodent now better than Colgate strong teeth delivers 130% germ attack power.

Uses Children In advertising: In Market, Children are becoming prominent part for advertisement. Marketers are using children in their advertisements to increase sales. This is done because Indian children are allowed to watch each & every advertisement in the television, so marketers are taking advantages of it. There are many commercial ads where marketers use children even the products are not for children like, Super Nirma, Surf Excel etc. which is irrelevant for marketing point of view. These types of ads are basically to win emotion of the customers. Using children in advertisements particularly in India where many people can’t afford the products but children force them to buy those products which affect their economic levels, so marketers should go for children advertisement for their relevant products only.

2.1.3 Ethical Dilemmas in Marketing

Marketing professionals with a backbone reap great rewards, including a solid career with the potential for advancement. But the high road is not always the easiest path to take.
“You know right from wrong,” says Laura Hartman, professor of business ethics at the DePaul University College of Commerce and author of Business Ethics: Decision-Making for Personal Integrity & Social Responsibility. “What’s tough is standing up for it. Sometimes, it takes a lot of courage to be ethical.”

Making moral decisions also requires intelligence and forethought. It’s easy, say professionals in the field, to fudge the truth to make a sale and believe the bottom line will be the better for it. Try telling that to those who were marketing Enron, the defunct Texas-based energy company marred by accounting fraud and cover-ups. “Someone was selling the deal,” says Victoria Crittenden, chairperson of the MBA Core Faculty at Boston College. “We just don’t hear about it.” But just because the marketing arm of an organization doesn’t get as much attention as the finance group, does not mean marketers have free reign.

In fact, everyone in business is wise to develop moral fibers, because ethical problems often lead to legal problems, which bite into profits -- not to mention your career ladder. The first step to confronting any dilemma is recognizing the moral dimension of it. Only then can you properly weigh the pros and cons of your options. Here are common ethical dilemmas you’re likely to face as a marketing professional and steps to keep your reputation intact:

Ethical Dilemma: How Far Can You Go in Stealth Marketing?
Scenario: An actor hired by a particular company poses as an ordinary Joe and strikes up a conversation with a potential consumer to praise the company’s product or service. Is this fair?
Case Study: Don’t think this could actually happen? Think again, says Hartman, who wrote about Sony Ericsson hiring actors posing as tourists to go to the Empire State Building to ask other visitors to take photos of them with the brand’s cameras. Then, the actors talked up the product. She cites other examples such as companies having publicity hires write recommendations for goods and services on various Web sites without disclosing their employer. These maneuvers, known as stealth marketing, are a hotly debated topic in the industry. Where should you stand?
Plan of Action: With an ever more sophisticated clientele, companies are quickly learning that transparency rules today’s marketplace. Therefore, experts say your only choice is to be honest and forthright. If you want consumers to sample your product in a natural setting, you can still have them do so. Just let them know who you are and why you’d like to talk to them. If the product is a good one, then your honesty should in no way diminish it.

Ethical Dilemma: Can You Sell Customer Information?
Scenario: When customers shop your online store, they leave an electronic trail that provides lots of information -- from their name and address to the types of goods that interest them when they search the site. A partner company would like to buy the data from you. Should you make the sale? Do you even have the right to use that information in house?
Case Study: Telemarketers and junk email are a part of everyday life. There’s no question that someone is passing around contact information. Companies are always looking to get in touch with customers and find out about purchasing patterns, says H. David Hennessey, professor of marketing at Babson College. Using consumer information is a privacy and fairness issue if not a legal one, he adds, because many people think their purchases are anonymous or somehow protected.
Plan of Action: Consult the company’s code of ethics to determine if standards have already been set about how much information you can use internally and externally, says Hennessey. He suggests you put together a group to create a policy about the acceptable ways to use information consumers share with you. Consider privacy law and the American Marketing Association’s set of standards when determining your code of conduct, say experts. Sometimes, the easiest and most effective way to confront such questions is simply to put yourself in your client’s shoes. Would you consider the use an invasion of privacy or betrayal?

Ethical Dilemma: Should You Recall a Flawed Product?
Scenario: You discover a flaw in one of your products, but telling the public might affect sales. What should you do?
Case Study: Many a company has had to grapple with this problem. Think of what must go into the decision to recall cars. Pet food makers had to react to the fact that some food was tainted and killing beloved cats and dogs. In 2006, some consumers of Bausch & Lomb’s ReNu with MoistureLoc contact lens solution suffered from a fungal eye infection, and the company’s marketers were criticized for reacting slowly and being close-lipped. Although extreme, these examples highlight the importance of gaining and maintaining consumers’ trust.
Plan of Action: Marketing 101 taught you that your main priority should always be to focus on the positives of the products and services you offer. However, you have to remember that stakeholders in your company aren’t just the financiers who birthed the enterprise but are also the consumers who keep its heart beating. “If profit maximization is going to lead the decision maker down the wrong path, that’s not right,” says Kirk Davidson, professor of corporate social responsibility and marketing at Mount St. Mary’s University in Emmitsburg, Maryland. “You can achieve satisfactory profits and do the right thing.”
Any industry expert will tell you -- just as they did Bausch & Lomb in 2006 -- if your product is in any way harmful, you must be honest, ask forgiveness and take action immediately. Take a page from Johnson & Johnson’s handbook. The company’s handling of the Tylenol tragedy in 1982, when seven people in Chicago died as a result of ingesting cyanide-laced Tylenol Extra-Strength capsules, is considered the best example of how to handle a product liability issue. The company swiftly pulled the products from the shelves and quelled the nerves of its consumers.

Ethical Dilemma: What’s Appropriate in Comparison Marketing?
Scenario: You’d like to put out an ad for your client that compares his product to the competition. How far can you go?
Case Study: Once you start looking for examples of comparison marketing, you will find them everywhere. Makers of acne medication pit an image of a client using one product, say Proactive, versus photos of the same person using a rival product to show which zaps more zits. Phone companies are notorious for comparing their services and charges to those of a rival in television ads.
Plan of Action: There’s nothing wrong with wanting to show up the competition -- as long as you don’t step over the line. Be sure that everything you are publicly saying in favor of your company or product and against your competitor is actually true. Test the goods yourself before committing to any promotional materials. Double and triple check the facts. The bottom line is that inaccuracies in such comparison marketing undoubtedly lead to a courtroom, where your rivals will call you out on your errors. You could lose the big bucks, not to mention the respect of an otherwise trusting public.             

2.1.4 Ethics in Advertising and Types of Unethical Advertisements

• Surrogate Advertising – In certain places there are laws against advertising products like cigarettes or alcohol. Surrogate advertising finds ways to remind consumers of these products without referencing them directly.
• Exaggeration – Some advertisers use false claims about a product’s quality or popularity. A Slogan like “get coverage everywhere on earth” advertises features that cannot be delivered.
• Puffery – When an advertiser relies on subjective rather than objective claims, they are puffing up their products. Statements like “the best tasting coffee” cannot be confirmed objectively.
• Unverified Claims – Many products promise to deliver results without providing any scientific evidence. Shampoo commercials that promise stronger, shinier hair do so without telling consumers why or how.
• Stereotyping Women – Women in advertising have often been portrayed as sex objects or domestic servants. This type of advertising traffics in negative stereotypes and contributes to a sexist culture.
• False brand comparisons – Any time a company makes false or misleading claims about their competitors they are spreading misinformation.
• Children in advertising – Children consume huge amounts of advertising without being able to evaluate it objectively. Exploiting this innocence is one of the most common unethical marketing practices

Advertising is considered unethical when

1. It gives false information.

2. It degrades the rival’s product or substitute product.

3. It makes exaggerated or tall claims.

4. It is against the national and public interest.

5. It gives misguiding information,

6. It conceals information that vitally affects human life.

7. It is obscene or immoral.

Unethical advertising can take any of the following forms

1. The use of sex, especially the use of women as sex objects

It is true in case of many products like after shave lotion, motor cycles, etc., in which the women are used in advertisements but in real life, women have nothing to do with these products.

2. Alcohol Advertising

Alcohol advertising is banned on broadcast and print media in India. But we can find manufacturers of alcohol advertising for Soda, to keep the brand name afresh in the minds of the consumers.

3. Tobacco Advertising

Tobacco advertising is considered an unethical advertising practice. All cigarette advertisements should carry a Statutory warning that Smoking is injurious to health in order to highlight the risks involved. But in reality, the advertisers release very colorful and catchy advertisements of cigarettes that give an impression, especially to the youth that smoking cigarettes is indeed graceful.

4. False Claims

a. If an air-conditioning company advertises that it uses imported compressors in their machines for ensuring better performance while actually using an indigenously manufactured one, then it is a case of false claim.

b. Advertisements offering mixtures and substances that claim to possess the ability to prevent people from ageing are categorized as unethical.

5. Exaggerated Claims

Such claims include those that make an assurance which may not be true. For example, if a shampoo manufacturer claims that their product will remove dandruff in hair forever even when used only once, is a case of an exaggerated claim.

6. Unverified claims

The language used in such advertisements will be quite ambiguous. For example, if a company advertises that its product offers instant hi-energy drink for children. But the question arises what do we mean by instant hi-energy drink and what are its parameters? And also if there is no scientific verification of the energy it possesses, such advertisements are included under unverified claims.

2.2 Ethics in Finance:

2.2.1 Scope of Ethics in Financial Services

Ethics in general is concerned with human behavior that is acceptable or "right" and that is not acceptable or "wrong" based on conventional morality. General ethical norms encompass truthfulness, honesty, integrity, respect for others, fairness, and justice. They relate to all aspects of life, including business and finance. Financial ethics is, therefore, a subset of general ethics.

Ethical norms are essential for maintaining stability and harmony in social life, where people interact with one another. Recognition of others' needs and aspirations, fairness, and cooperative efforts to deal with common issues are, for example, aspects of social behavior that contribute to social stability. In the process of social evolution, we have developed not only an instinct to care for ourselves but also a conscience to care for others. There may arise situations in which the need to care for ourselves runs into conflict with the need to care for others. In such situations, ethical norms are needed to guide our behavior. As Demsey (1999) puts it: "Ethics represents the attempt to resolve the conflict between selfishness and selflessness; between our material needs and our conscience."

Ethical dilemmas and ethical violations in finance can be attributed to an inconsistency in the conceptual framework of modern financial-economic theory and the widespread use of a principal-agent model of relationship in financial transactions. The financial-economic theory that underlies the modern capitalist system is based on the rational-maximizer paradigm, which holds that individuals are self-seeking (egoistic) and that they behave rationally when they seek to maximize their own interests. The principal-agent model of relationships refers to an arrangement whereby one party, acting as an agent for another, carries out certain functions on behalf of that other. Such arrangements are an integral part of the modern economic and financial system, and it is difficult to imagine it functioning without them.

The behavioral assumption of the modern financial-economic theory runs counter to the ideas of trustworthiness, loyalty, fidelity, stewardship, and concern for others that underlie the traditional principal-agent relationship. The traditional concept of agency is based on moral values. However, if human beings are rational maximizers, then agency on behalf of others in the traditional sense is impossible. “To do something for another in a system geared to maximize self-interest is foolish. Such an answer, though, points out an inconsistency at the heart of the system, for a system that has rules requiring agents to look out for others while encouraging individuals to look out only for themselves, destroys the practice of looking out for others".

The ethical dilemma presented by the problem of conflicting interests has been addressed in some areas of finance, such as corporate governance, by converting the agency relationship into a purely contractual relationship that uses a carrot-and-stick approach to ensure ethical behavior by agents. In corporate governance, the problem of conflict between management (agent) and stockholders (principal) is described as an agency problem. Economists have developed an agency theory to deal with this problem. The agency theory assumes that both the agent and the principal are self-interested and aim to maximize their gain in their relationship. A simple example would be the case of a store manager acting as an agent for the owner of the store. The store manager wants as much pay as possible for as little work as possible, and the store owner wants as much work from the manager for as little pay as possible. This theory is value-free because it does not pass judgment on whether the maximization behavior is good or bad and is not concerned with what a just pay for the manager might be. It drops the ideas of honesty and loyalty from the agency relationship because of their incompatibility with the fundamental assumption of rational maximization. "The job of agency theory is to help devise techniques for describing the conflict inherent in the principal-agent relationship and controlling the situations so that the agent, acting from self-interest, does as little harm as possible to the principal's interest" (DE George, 1992). The agency theory turns the traditional concept of agency relationship into a structured (contractual) relationship in which the principal can influence the actions of agents through incentives, motivations, and punishment schemes. The principal essentially uses monetary rewards, punishments, and the agency laws to command loyalty from the agent.

2.2.2 Ethics of a Financial Manager

Financial managers prepare reports, oversee accounting functions, plan investment strategies and direct cash management functions. They also are involved in branch management functions at banks and other financial institutions. They are required to uphold the highest ethical standards because internal and external stakeholders depend on transparent, timely and complete financial documents to make decisions.

Legal Issues, Balancing Act and Whistle Blower

Accuracy

A company’s financial manager ensures that all financial publications accurately and fairly reflect the financial condition of the company. Accounting errors and financial fraud, such as what was seen in the cases of Enron and WorldCom, damage the interests of shareholders, employees and affect confidence in the financial system. Some organizations document ethics guidelines specifically for financial managers. For example, the ethics code of the United States Postal Service requires senior financial managers to maintain accurate records and books, maintain internal controls and prepare financial documents in accordance with generally accepted accounting principles.

Transparency

Financial documents reflect a company's performance relative to its peers, and its internal strengths and weaknesses. Regulatory agencies require publicly traded companies to submit periodic financial statements and make full disclosures of material information. A change in the senior executive ranks, buyout offers, loss or win of a major contract and new product launches are examples of material information. Transparency also means explaining financial information clearly, especially for those who aren't familiar with the company’s operations. Financial managers should not hide, obscure or otherwise render relevant financial information impossible for ordinary shareholders to understand.

Timeliness

Timely financial information is just as important as accurate and transparent information. Management, investors and other stakeholders require timely information to make the right decisions. Many cases exist of a publicly traded company's stock reacting sharply and negatively to negative earnings surprises or unpleasant product-related news. For example, a company should promptly disclose manufacturing problems that could temporarily affect sales. Similarly, the company should not hold back news of a major contract loss in the hope that it can replace the lost revenue with new contracts.

Integrity

Financial managers should strive for unimpeachable integrity. Customers, shareholders and employees should be able to trust a financial manager's words. Managers should not allow prejudice, bias and conflicts of interest to influence their actions. Managers should disclose real or apparent conflicts of interest, such as an investment position in a stock or an ownership interest in one of the bidding companies for a procurement contract. The structure of certain stock-based incentive compensation schemes could also result in ethical issues. For example, managers might be tempted to manipulate stock prices by selectively disclosing or not disclosing relevant financial information.

The role of ethics in financial management is to balance, protect and preserve stakeholders' interests. Eli Lilly and Company, for example, says its code of ethics in finance covers obligations to management, fellow employees, business partners, the public and shareholders. Typical standards found in a code of ethics in finance include:

• Act with honesty and integrity.
• Avoid conflicts of interest in professional relationships. Also, avoid the appearance of such conflicts.
• Provide people with accurate, objective, understandable information. Disclose all relevant information, positive and negative, so that your listeners have an accurate picture.
• Comply with all rules and regulations governing your position and your company.
• Act with good faith and independent judgment. Don't allow self-interest or other factors to sway your recommendations.
• Never share confidential information or use it for personal gain.
• Maintain an internal controls system to guard against unethical behavior.
• Report anyone you see violating the code. 

Financial managers shouldn't see the code as setting a limit on ethical behavior: Tick off all the boxes, and you're good. Having ethics in finance means doing the right thing, even in situations that aren't covered on the list. If in doubt, find someone with the standing to give you ethical guidance.

2.2.3 Ethics in Taxation

Any discussion of ethics at its core involves understanding right and wrong. This may seem simple on the surface, but as anyone who has studied philosophy will readily admit, there is much more complexity to this practice. In professions like tax preparation, accountancy, and other similar professions, ethical questions are likely to arise on a regular basis. Naturally, federal and local laws govern a great deal of these decisions, as well as ethical codes laid out by professional organizations. At the end of the day, making that crucial distinction between right and wrong in a given scenario requires tax professionals to use their training to make an informed judgment. 

Any tax professional with the appropriate education, training, and experience is certainly familiar with the U.S. tax code, along with a litany of state and local laws and regulations governing tax practice. Whether they are working with clients to prepare individual tax returns, working as an accountant for a company, or providing any kind of professional tax advice, anyone interfacing directly or indirectly.

2.2.4 Corporate Crime - White Collar Crime and Organised Crime

Corporate crime, also called organizational crime, type of white-collar crime committed by individuals within their legitimate occupations, for the benefit of their employing organization. Such individuals generally do not think of themselves as criminals, nor do they consider their activities criminal. Related to corporate crime is professional white-collar crime, which is crime committed by those who identify with crime and make crime their sole livelihood.

Most criminologists divide white-collar crime into two major types: corporate crime and occupational crime (crime committed during the course of a legitimate occupation, for one’s own benefit). Most corporate criminals do not view their activities as criminal, since their violations are usually part of their occupational environment. Corporate offenders remain committed to conventional society and do not identify with criminality. Their inappropriate behaviour is often informally approved by occupational or corporate subcultures

While corporations may complain about the burden of federal bureaucracies and their enforcement of regulations, guilty companies generally have more expertise, staff, and time to devote to their defense than the government has for prosecution. Regulatory agencies have been criticized as being ineffective in enforcing laws against powerful corporations. Often the penalties for law violation are too small to act as deterrents. Offenders are seldom convicted and rarely get jail time. Many are permitted to plead nolo contendere (no contest) to charges, which enables them to escape the stigma of being labeled “guilty” or “criminal.” The appointed directors of agencies are often drawn from the very corporations to be regulated; these same companies may then hire retiring agency employees. In addition, the amount of money governments assign to corporate crime generally is much smaller than that allocated for street crime.

• White-collar crime is non-violent wrongdoing that financially enriches its perpetrators
• These crimes include misrepresentation of a corporation's finances in order to deceive regulators and others
• A host of other offenses involve fraudulent investment opportunities in which potential returns are exaggerated and risks are portrayed as minimal or non-existent

Some definitions of white-collar crime consider only offenses undertaken by an individual to benefit themselves. But the FBI, for one, defines these crimes as including large-scale fraud perpetrated by many throughout a corporate or government institution.

In fact, the agency names corporate crime as among its highest enforcement priorities. That's because it not only brings "significant financial losses to investors," but "has the potential to cause immeasurable damage to the U.S. economy and investor confidence."

Falsification of Financial Information

Most corporate fraud cases involve accounting schemes that are conceived to deceive investors, auditors, and analysts about the true financial condition of a corporation or business entity. Such cases typically involve manipulating financial data, the share price, or other valuation measurements to make the financial performance of the business appear better than it actually is.

The majority of corporate fraud cases involve accounting schemes that are conceived to deceive investors, auditors, and analysts about the true financial condition of a corporation or business entity. Such cases typically involve manipulating financial data, the share price, or other valuation measurements to make the financial performance of the business appear better than it actually is.

For instance, Credit Suisse pleaded guilty in 2014 to helping U.S. citizens avoid paying taxes by hiding income from the Internal Revenue Service. The bank agreed to pay penalties of $2.6 billion. Also in 2014, Bank of America acknowledged it sold billions in mortgage-backed securities (MBS) tied to properties with inflated values. These loans, which did not have proper collateral, were among the types of financial misdeeds that led to the financial crash of 2008. Bank of America agreed to pay $16.65 billion in damages and admit to its wrongdoing.

Self-Dealing

Corporate fraud also encompasses cases in which one or more employees of a company act to enrich themselves at the expense of investors or other parties. Self-dealing is when a fiduciary acts in their own best interest in a transaction rather than in the best interest of their clients. It represents a conflict of interest and an illegal act, and can lead to litigation, penalties, and termination of employment for those who commit it. Self-dealing may take many forms but generally involves an individual benefiting — or attempting to benefit — from a transaction that is being executed on behalf of another party. For example, front-running is when a broker or other market actor enters into a trade because they have foreknowledge of a big non-publicized transaction that will influence the price of the asset, resulting in a likely financial gain for the broker. It also occurs when a broker or analyst buys or sells shares for their account ahead of their firm's buy or sell recommendation to clients.

Most notorious are insider trading cases, in which individuals act upon, or divulge to others, information that isn't yet public and is likely to affect share price and other company valuations once it is known. Insider trading is illegal when it involves buying or selling securities based on material non-public information, which gives that person an unfair advantage to profit. It does not matter how the material nonpublic information was received or if the person is employed by the company. For example, suppose someone learns about nonpublic material information from a family member and shares it with a friend. If the friend uses this insider information to profit in the stock market, then all three of the people involved could be prosecuted.

Other trading-related offenses included fraud in connection with mutual hedge funds, including late-day trading and other market-timing schemes.

2.2.6 Major Corporate Scams in India

1. Satyam computer (Satyam)

Satyam was the first major fraud of its kind, which shocked the country and led to tightening of regulations, reporting and governance mechanisms. The fraud had the same shock and awe effect like what Enron and Lehman brothers had in the USA. The enactment of strictest ever regulation, namely, Sarbanes and Oxley, was the outcome of these frauds and many countries followed with enactment of similar regulations.

Promoters of the company had devised ingenious methods to commit frauds with large scale dummy billings for services rendered to foreign clients. As a logical step forward, fake proceeds were shown to have been received in multiple bank accounts, opened in various countries. Many of these accounts were later found to be non-existing.

The company was consistently showing large bank balances in its financial statements, which were not consistent with other IT companies considering the size of its business. The whole of these operations was overseen by the promoter with the assistance of a separate staff working on this, what I would call a fraud factory.

At the closure of financials and to satisfy auditors, fake bank confirmations and statements were generated and produced as evidence of balances to auditors. The amount involved in the fraud was around USD 1 billion.

Surprisingly, Satyam received awards for excellence in corporate governance, conferred by some reputed organisations. Its promoter had over a period acquired respect of the industry and an overwhelming persona. In this background, sudden admission of fraud by the promoter, came as a rude shock to the country,

All said and done, Satyam had a sound business model and portfolio of large international clients. Government had to initiate an unprecedented rescue mission to save the company, by first dismissing the board members of the company, followed by the appointment of professionals as board members led by Deepak Parikh. Ultimately, the company was sold to Mahindra group and is now a major part of the successful technology business of the Group. 

2. Kingfisher Airlines (KLA)

KLA was another corporate fraud, which was first of its kind in the Airlines industry, which ultimately led to fall of the empire of King of good times. The airline was launched by flamboyant Vijay Mallya, well known as King of good times. Over a short period of time KLA established a reputation of finest private airline of the country, with high quality service standard and was enjoying second highest market share after Jet Airways.

The company resorted to borrowing funds by all possible means, including related parties and pledge of Kingfisher brand by over-valuation of brand value. Good times did not last long, and Vijay Malia had to sell its family jewel liquor and beer business to liquidate part of its debts.

Currently Vijay Malia is in the UK and fighting battle in courts to stop his repatriation into India. Consortium of banks led by SBI has exposure of around Rs, 9000 crores to now a virtually bankrupt airline. Most employees lost or quit jobs as salaries were nor paid for months together. The company went to the extent of defaulting in depositing statutory dues like PF, TDS deducted from salaries to government authorities.

Kingfisher seems to me more of a case of business failures rather than corporate frauds. There were a lot of red flags which could have been picked by lenders and regulators, which were ignored and could have saved airlines which had good potential. Lending against a brand which had never been a practice is a glaring example. A Satyam type quick rescue operation could have parachuted the airline into safety and saved lenders money and employees’ jobs.

3. Jet Airways

The airline, which was once India’s pride, landed in IBC for rescue. After multiple bidding over 18 months, Jet finally had a bidder (with an investor), who is non- experienced in the airlines business.

Jet had acquired an unassailable position in the industry and was a preferred airline for the business community, top industrialists and CEOs of the country. Its service standards were its USP.

Lenders’ exposure to the airlines, amounts to around Rs 8500 crores and total liabilities of around Rs.25000 crores including dues to vendors, employees, AAI, lessors of aircrafts.    

The company indulged in multiple fraudulent practices of -

• Overstating commission paid to a Dubai related party based in Dubai for years. This resulted in significant overstatement of expenses and underreporting of profits.
• diversion of funds by giving loans of around Rs.3353 Crores
• accounting of invoices of fake  on Jet miles
• other similar transactions

Employees lost jobs with huge arrears of salaries. Further, acquisition of low-cost service airline, Sahara Airlines - in hindsight, the acquisition proved to be its nemesis and accelerated the downfall of Jet Airways.

4. Bhushan Steel

Bhushan Steel was an unprecedented case of defrauding major banks of India. The company was acquired by Tata Steel, though matter is still under litigation. 

Promoters of the otherwise profitable company, with modern large-scale plants, indulged in multiple fraudulent practices of: 

• Transfer of   funds borrowed by the company to various related parties by way of loans or advances 
• Accounting of bills for capital and other purchases, which were never incurred and funds so generated were misappropriated by promoters for their benefits
• Amount involved was around Rs. 50000 crores.

Bhushan Power and Steel (BPSL), another group company is currently under IBC. JSW Steel is expected to acquire BPSL.

According to the CBI, BPSL diverted around Rs 2,348 crore through its directors and staff from the loan accounts of various banks, into the accounts of more than 200 shell companies without any obvious purpose.

5. PNB

PNB was the first major banking fraud reported in the country, involving a massive amount of around Rs. 15000 crores. Fraud was committed by Nirav Modi and Mehul Choksi, (through Gitanjali Gems, a listed company owned by him). Both were in the business of importing rough diamonds and exporting polished diamonds.

Over a period, both had built retail chains of diamond business in India and at famous international destinations. Nirav was, particularly, PR and showmanship savvy.

At that time no one questioned the source of his funding. It was only after a few years, that this unprecedented fraud came to light, which shocked the nation as never before.

He was defrauding PNB and other bankers by opening LCs of large amounts without any underlying transactions (paper money in essence), with the connivance of a few junior level banking officials. He exploited an elementary deficiency in the IT systems of non-reconciliation of LCs opened with the underlying transactions. LCs opened were not recorded in the RTGS system as was the requirement applicable to all banks. Hence, existence of such LCs was not known till the time the fraud was unearthed. 

Amounts involved are estimated to be around Rs 16000 crores (including dues of Mehul Choksi). Here again, there were multiple red flags, which were ignored by banks management and regulators, which could have unearthed the fraud much earlier. Periodic inspection reports of RBI, highlighting this deficiency, which were placed before the board, were not actioned, RBI also issued red alert to all banks several times, instructing banks to set right these system deficiencies (mainly RTGC and non-reconciliation). But these also went unattended.

Nirav and Mehul managed to fly out of India and currently India is trying hard in international courts to bring them back to India.

6. ILFS

ILFS fraud was the largest corporate fraud in India and triggered a showdown in the economy, as the company was a key vehicle for infrastructure development of the country. Fraud occurred, in spite of marquee shareholders like LIC, SBI etc., being the largest shareholders, having representatives on board. ILFS had the largest debt exposure of around Rs. 91000 crores (including Rs, 20000 crores invested by PF and pension funds),

Fraud was perpetrated mainly by: 

• Diversion of borrowed funds to related entities of some of members of top management team
• Imprudent lending to parties who were not credit worth for ulterior motives
• Evergreening of loans by routing money from one group company to another through an unrelated party
• Over invoicing of project costs by vendors, accounting of fake expenses etc and difference being routed back to related entities of some of members of top management team
• Overstatement of profits by non- provisioning of loans, accounting of fake expense, inappropriate recognition of project revenue etc.
• The company had unprecedented number of subsidiaries and group companies, (346) which were used to route above transactions
• Non – disclosure of some of these companies as related parties
• Non-disclosure some of subsidiaries, associates, joint ventures

Most of the mutual funds, insurance companies and PF gratuity funds had invested large sums in its debt issuance, due to the high credit rating of the company. It was a case of negligence by reputed credit rating agencies that rating was not downgraded in spite of clear signs of financial stress in the company. Rating was downgraded abruptly to lowest level from the highest only after the company defaulted in its repayment obligations.

Surprisingly, this public interest entity, was run for years by the same top management team, who were treating ILFS as personal property. Their subordinates and even Board were so overawed by their overpowering persona that no one dared to challenge their decisions. Fraud was going on for years, but could not be detected till the damage was done.

Like Satyam, the government suspended the board and appointed eminent experts to the board chaired by reputed and seasoned banker, Uday Kotak. Currently the company is under resolution process and some of its infrastructure has been sold. However, progress has been slow. Hence, the extent and timing of recovery is uncertain.

7. DHFL

DHFL was the first ever fraud in a housing finance company, which happened mainly due to active involvement of promoters in syphoning of funds and alleged money laundering.

How fraud was committed: 

• Granting of loans to related parties of promoters
• Loans granted to parties, who were not credit worthy or were unknown having same addresses in obscure locations
• Evergreening of bad loans
• Creation of around 6 lacs dummy accounts at one branch, using name of borrowers who had already repaid loans. These accounts were used to grant loans which were used to siphon funds to promoter companies. These loans ultimately turned out to be non-recoverable
• Utilization of borrowed funds for personal purposes, such as acquiring personal properties, yachts etc.
• Consequently, huge amounts were shown as recoverable in the balance sheet, which were not recoverable

8. PMC Bank

Promoters of DHFL were de-facto controlling operations of PMC bank, (a cooperative bank), perpetuated frauds by adopting identical methods. The bank had larger deposits of middle-class depositors, who had deposited their hard-earned savings with the bank for various requirements like medical treatment, education cost of children, retirement, and emergency needs. More than 60% of its customers had small deposits of around ₹10,000 each in the bank.

During investigation, it was found that:

• Around 70 percent of its total loan book of Rs 8,383 crore as on March 31, 2019, had been taken by real estate firm HDIL.
• The bank had been allegedly running fraudulent transactions for several years to facilitate lending to HDIL through fictitious accounts and violating single-party lending rules.

Depositors are struggling to recover their money and some of them committed suicide. Authorities are in the process of recovering properties acquired by the promoters and progress is tardy.

As per latest newspaper reports, the bank has invited expression of interest for investment and equity participation in the bank for its reconstruction.

9. YES Bank

Fraud led to the unexpected and sudden fall of a private bank which was emerging as a good competition to other private banks. The bank had a differentiated business model, with focus on technology, branches network, focus on retail loans etc. 

Promoter of the bank, Rana Kapoor had, over a short period of time, built an overwhelming image in the industry and had developed contacts with top industrialists of the country. Most of the decision making on key matters including large loans was centralized in his hands. He had the ambition to make YES Bank the largest private bank of the country. It was this ambition which perhaps led to the sharp downfall in fortunes of the bank, steeper than its rise to an eminent position in the banking industry.

How fraud was committed:

• Imprudent lending practices
• Evergreening of loans
• Practice of charging high commission to borrowers, which was not in line with industry practices
• Overstatement of profits due to front loading of commission income
• Gross under provisioning of NPAs compared to RBI guidelines

During special inspection carried out by RBI (Asset quality reviews-AQR which was carried for all banks), significant differences were observed between actual and required provisioning for various years.

Finance ministry acted swiftly to restore the confidence in the banking system and a majority stake in the bank was acquired by SBI. Efforts are still on to ensure that the bank is restored to its original health by significant equity infusion by institutional investors and other measures.

10. Cafe Coffee day (CCD)

CCD was the first company to set up a large chain of coffee shops across India and a trend setter. Over-leveraging to find expansion of the chain and diversion of funds to non-core business led to the downfall of the Company, which had a sound business model from growing coffee in its own fields to serving a wide variety of coffee to customers. 

The debacle of company resulted in unfortunate suicide by its promoter. Amounts due to banks are around Rs. 2500 crores to Rs. 3000 crores. Currently, Tata group is in talks with CCD for acquiring its coffee outlets, which if materializes, will rescue the company, and put it back on the recovery path.

11. Spot Exchange of India

The company lured Investors with high assured returns by raising money bills purported to represent purchase of commodities. These stocks were subsequently sold back to investors at a predetermined rate to give assured returns.

There were no physical stocks available with the exchange. The whole transaction was in substance a pure investment transaction without any underlying stocks.

It was a case of teeming and lading, where money invested by one investor was utilized to pay another investor with assured returns. Regulators banned such transactions, when these wrongdoings came to their notice. Sudden ban closed the taps and in the absence of fresh inflow from investors, the Exchange intermediaries could not honor the transaction of sales back to investors.

As of now, most of investors’ money is stuck and part payments had been made from sale proceeds of attached assets of promoters. Ultimate recovery, both time and extent, is currently uncertain.

Other major frauds, which occurred in the last few years are:

• Ranbaxy and Religare group (Singh Brothers)
• Kwality products
• Amrapali builders
• C G Consumers
• Cox & Kings

2.2.7 Role of SEBI in Ensuring Corporate Governance

Founded in 1988, the Securities and Exchange Board of India (SEBI) has the role to protect investors and regulate the financial market. SEBI initiatives in corporate governance are based on the Securities and Exchange Board of India Act and aim to prevent fraudulent practices. The organization is responsible for enforcing rules and regulations to promote orderly development in the stock market. As an investor, you must comply with these rules and follow the code of conduct.

The Indian securities market is one of the most trusted in the world. However, things haven't always been this way. Back in the '80s, everyone was trying to find loopholes in the system and get rich through fraudulent schemes. Today, this market is tightly regulated by the Securities and Exchange Board of India, whose role is to prohibit unfair trade practices and protect investors' interests, among other functions.

The organization became autonomous and got the statutory status in 1992. Soon, it has emerged as the regulator of stock markets in India, overseeing the activities of investors, securities issuers and market intermediaries. SEBI is also responsible for carrying out investor awareness and training programs and regulating major transactions. Furthermore, it monitors credit rating agencies, custodians, bankers, brokers and other financial market players.

Several departments exist within SEBI, including but not limited to the Corporation Finance Department (CFD), the Legal Affairs Department, the Market Regulation Department and the Office of International Affairs. The CFD, for example, oversees all matters related to corporate governance and accounting standards. The Office of Investor Assistance and Education (OIAE), on the other hand, handles investors' complaints, such as those related to the transfer of shares.

Corporate governance encompasses the mechanisms, rules and practices by which companies are operated and controlled. It aims to mitigate conflicts of interest between shareholders and promote ethical decision-making, transparency and integrity at the executive level. The role of SEBI in corporate governance is to ensure these rules are implemented and followed by all parties.

For example, the organization ensures that companies issuing securities use fair practices and disclose relevant information to the shareholders. It also regulates takeovers, listing agreements of stock exchanges, corporate restructurings and more. SEBI guidelines for corporate governance are designed to provide a safe, transparent environment for investors and prohibit fraudulent or unfair practices, like insider trading.

The role of SEBI in ensuring ethical standards among corporations became even more important in 2018 when the organization imposed additional compliance conditions. For instance, big firms will be required to have at least one woman independent director and separate chairpersons and CEOs. Furthermore, listed companies must disclose related-party transactions and hold a specific number of annual general meetings. SEBI initiatives in corporate governance are largely based on the recommendations made by the Kotak committee in March 2018 and aim to enhance transparency.

Key Functions of SEBI

In addition to its role in corporate governance, SEBI has protective, regulatory and developmental functions. The organization protects investors by prohibiting malpractices related to securities and promoting fair trade practices. Additionally, it aims to educate them on money management, trading and finances in general.

Its regulatory functions have the role to ensure that corporations and financial intermediaries alike follow its guidelines and code of conduct. The end goal is to keep the financial market running smoothly.

The developmental functions of SEBI aim to promote computerized trading and modernize the market infrastructure. These initiatives have led to a reduction in fraud and unfair practices. For example, the organization requires companies that buy or sell stocks to register for a dematerialization (Demat) account online, which helps reduce bureaucracy and simplifies the process of holding investments. The Demat system allows traders to work from anywhere and mitigates the risks associated with paper shares, such as trading delays or thefts.

2.2.8 Cadbury Committee Report, 1992

The chairman's role in securing good corporate governance is crucial. Chairmen are primarily responsible for the working of the board, for its balance of membership subject to board and shareholders' approval, for ensuring that all relevant issues are on the agenda, and for ensuring that directors, executive and non-executive alike, are enabled and encouraged to play their part in its activities. Chairmen should be able to stand sufficiently back from the day-to-day running of the business to ensure that their boards are in full control of the company's affairs and alert to the obligations to their shareholders.

It is for chairmen to make certain that their non-executive directors receive timely, relevant information tailored to their needs, and that they are briefed well enough on the issues arising at meetings for them to be effective board members.

Given the importance and particular nature of the chairman's role, it should in principle be separate from that of the chief executive.

If the two roles are combined in one person, it represents a considerable concentration of power. We recommend, therefore, that there should be clearly accepted division of responsibilities at the head of a company, which will ensure a balance of power and authority, such that no one individual has unfettered powers of decision.

THE GENESIS

The Cadbury Committee was set up in May 1991 by the Financial Reporting Council, the London Stock Exchange and the accountancy profession to address the financial aspects of corporate governance.

Its chairman was Sir Adrian Cadbury. The sponsors were concerned at the perceived low level of confidence both in financial reporting and in the ability of auditors to provide the safeguards which the users of company reports sought and expected.

The underlying factors were seen as the absence of a clear framework for ensuring that directors kept under review the controls in their business, together with the looseness of accounting standards and competitive pressures, both on companies and on auditors, which made it difficult for auditors to stand up to demanding boards. These concerns about the working of the corporate system were heightened by some unexpected failures of major companies and by criticisms of the lack of effective board accountability for such matters as directors' pay.

Further evidence of the breadth of feeling that action had to be taken to clarify responsibilities and to raise standards came from a number of reports on different aspects of corporate governance which had either been published or were in preparation at that time.

SUMMARY OF RECOMMENDATIONS

The boards of all listed companies should comply with the code of best practice set out by the committee.

As many companies as possible should aim at meeting its requirements.

The listed companies reporting in respect of years ending on or after 31 December, 1992, should make a statement about their compliance with the code in the report and accounts and give reasons for any areas of non-compliance.

Companies should publish their statement of compliance only after they have been the subject of review by the auditors.

The Auditing Practices Board should consider the extent and form that an endorsement by the auditors could take.

2.3 Ethics in Human Resource Management:

Human resource management deals with manpower planning and development related activities in an organization. Arguably it is that branch of management where ethics really matter, since it concerns human issues specially those of compensation, development, industrial relations and health and safety issues. There is however sufficient disagreement from various quarters.

There are different schools of thought that differ in their viewpoint on role of ethics or ethics in human resource development. One group of thought leaders believes that since in business, markets govern the organizational interests and these interests are met through people, the latter are therefore at the highest risk. They believe that markets claim profits in the name of stakeholders and unless we have protocols, standards and procedures the same will develop into a demon monopolizing markets and crushing human capital; HR ethics are become mandatory.

There is another group of ethicists inspired by neo-liberalism who believe that there are no business ethics apart from realization of higher profits through utilization of human resources. They argue that by utilizing human resources optimally, there is more value creation for the shareholders, organization and the society and since employees are part of the society or organization, they are indirectly benefited. Nevertheless ethics in human resource management has become a perennial debate of late!

Discussions in ethics in HRD stem from employee relationships and whether or not there can be a standard for the same. Employee rights and duties and freedom and discrimination at the workplace are issues discussed and covered by most texts on the topic. Some argue that there are certain things in employment relationship that are constant others disagree with the same. For example, right to privacy, right to be paid in accordance with the work (fair compensation) and right to privacy are some areas that cannot be compromised upon.

2.3.1 Importance of Workplace Ethics

Workplace ethics ensures positive ambience at the workplace. Workplace ethics leads to happy and satisfied employees who enjoy coming to work rather than treating it as a mere source of burden. Employees also develop a feeling of loyalty and attachment towards the organization.

Organizations need to have fool-proof systems to measure the performances of individuals. Appraisal system needs to be designed keeping in mind employee’s performance throughout the year and his/her career growth. Periodic reviews are essential. It is mandatory for superiors to know what their subordinates are up to. You need to know who all are going on the right track and who all need that extra push. Workplace ethics ensures management guides and mentors their employees well. Appraisal and salary hikes should not happen just for the name sake. Workplace ethics is important as it enables management to treat all employees as equal and think from their perspective as well. Employees must have a say in their appraisal system.

Transparency is essential.

An employee is bound to move on after a year or so if he/she is not appreciated and rewarded suitably. It is indeed the organization’s loss when employees after being trained quit and move on. Do you think it is entirely the employee’s fault? Why would an employee move on if he/she is fully satisfied with his /her current assignment? Employees change primarily because of two reasons - Career growth and monetary benefits. Management needs to make employees feel secure about their job and career. Unnecessary favoritism is against workplace ethics. If you favor anyone just because he is your relative, the other team members are bound to feel demotivated and thus start looking for new opportunities. An individual’s output throughout the year should decide his/her increment.

Organizations need to stand by their employees even at the times of crisis. You cannot ask your employees to go just because you don’t need them anymore or your work is over. Such a practice is unethical. How can you play with someone’s career? If an individual has performed well all through but fails to deliver once or twice, you just can’t kick him out of the system. Workplace ethics says that organizations need to retain and nurture talents. If you have hired someone, it becomes your responsibility to train the individual, make him/her aware of the key responsibility areas, policies, rules and regulations and code of conduct of the organization. Employees need to be inducted well into the system. They must be aware of the organization’s policies from the very first day itself.

Workplace ethics also go a long way in strengthening the bond among employees and most importantly their superiors. Employees tend to lie if you do not allow them to take leaves. If you do not allow an employee to take leave on an important festival, what do you expect the employee to do? What is the alternative left with him? He would definitely lie. Do not exploit your employees and don’t treat them as machines. No employee can work at a stretch without taking a break. It is okay if they talk to their fellow workers once in a while or go out for a smoke break. Understand their problems as well. If you feel the problem is genuine, do not create an issue. It is but natural that once or twice they would definitely call their family members and enquire about their well-being. Superiors should not have a problem with that.

It has been observed that organizations which are impartial to employees, lend a sympathetic ear to their grievances and are employee friendly seldom face the problems of unsatisfied employees and high attrition rate.

2.3.2 Guidelines to Promote Workplace Ethics,

Workplace ethics ensures employees are treated with utmost respect. It also leads to a sense of satisfaction among employees and they develop a feeling of attachment towards their respective organizations. The feeling of loyalty is a feeling which is seen in very few individuals. For them, going to work is the best source of earning money and also keeping one-selves occupied. Organizations often complain of employees moving on when they are fully trained. An organization invests its time, money and energy in training a new employee and thus it is a big blow when he/she quits all of a sudden.

The best way to promote workplace ethics is to be very specific and careful while recruiting potential employees who would be representing the top levels especially the human resource department. It is rightly said that human resource professionals are the face of an organization. They need to understand the psychology of individuals well as they are the ones who have the responsibility of formulating policies, rules and regulations of the organization. Remember, policies should neither be too flexible nor too rigid. If policies are too flexible, no one actually follows them and if policies are too rigid, again employees would depend on excuses and lies to escape them. You must understand your nature of business. An organization which works primarily for US Clients can’t ask employees to report early in the morning as I am sure employees must be working till late or probably the whole night.

Human resource professionals ought to communicate the organization policies and code of conduct clearly to the employees the very first day. Also send them a mail for their ready reference. Tell them very clearly the office timings, hierarchy, dress code, salary structure, leave procedure, reporting structure and so on. In this case, they would never have an excuse later. Tell them from the very beginning that there are certain things which are expected out of them and organization is very strict on certain policies like coming to office on time, informed leaves etc. Make them clear that if they are caught bunking office or participating in unfair practices like stealing, passing on confidential information, they would be shown the exit door the very next day. Trust me, no one would even think of doing the same. Problems arise when employees are not aware of rules and regulations. Transparency between management and employees is of utmost importance and the best way to promote workplace ethics

Listen to what your employees have to say. Let them come out with their problems. Superiors need to interact with employees on a regular basis and address their grievances. Management needs to make employees feel comfortable. They might come up with lots of issues and as a boss it is your responsibility to guide them and help them with a solution. Even if the problem is illogical, do not be harsh to them. Make them realize as to where they are wrong. Open communication is the best way to promote workplace ethics. Constant mentoring plays an important role in motivating the employees to adhere to the organization policies.

No employee should be given special treatments. Bonuses and hikes must be proportional to the employee’s performance over a period of time. Appreciating the employee who really deserves is essential. Do not favor anyone just because you like him/her. Fair judgement is of utmost importance. You have nothing to do with his/her personal life. There should be absolutely no problem if an employee goes out to meet his girlfriend after office hours.

Organization needs to support its employees always, even at the hours of crisis. Job security and constant career growth are two most important factors which ensure employees stick around for a long time and also are satisfied with their current assignment. If employees are happy and contended and feel respected, they would also strive hard to deliver their level best every time.

2.3.3 Importance of Employee Code of Conduct

Employee code of conduct guides individuals as to how they should behave at the workplace. Employees need to be aware as to what is expected out of them in the office. You just can’t behave the same way at office as you behave at home. Your Boss can be your best friend outside office but at work you have to respect him and also treat him like your superior. Employee ethics is essential for maintaining discipline at the workplace. Management needs to be liberal with the employees but there has to be some element of fear also in the minds of employees. If the superiors are too friendly with their subordinates, there are chances they might start taking undue advantage of the friendship. There has to be a balance always. Yes, organization’s policies ought to be employee friendly but that does not mean employees come to office at 11 AM just because they cannot get up early in the morning. There has to be a genuine reason for everything.

There has to be a proper dress code for employees. Individuals just can’t enter into the office wearing anything. Employee code of conduct decides what individuals ought to wear to office. Some organizations are very particular of what their employees wear to work. Let us go through an example:

Organization A did not instruct employees about their dress code. There was really no strictness as far as dress code was concerned. One fine day; Paul came to office wearing T shirt and Capri. The same day, one of Organization A’s esteemed clients came for site visit. Trust me, the moment the client met Paul, he was rather surprised. Understand, coming in jeans and T shirt to work does not stop us from working but it just reflects the non-serious and casual attitude of employees. It is always better if employees come to work in formals. Casual dressing is okay on Saturdays but that does not mean you can come to work wearing shorts. Dress sensibly even if it is a weekend and you have already gone in the holiday mood. Employee dress code also ensures uniformity among employees.

Employee code of conduct ensures career growth and also benefits the organization in the long run. If employees understand the difference between what to do and what not to do at the workplace, problems would never arise. We bunk offices because we do not realize that such a practice is wrong and unethical. Employee ethics ensures employees adhere to the rules and regulations and also work for the organization. Employee ethics motivates employees not to indulge in gossiping, nasty politics, criticizing fellow workers, bunking office and so on. They seldom think of sharing confidential information or data with competitors and all their energies are utilized in productive activities which would benefit the organization.

Employee ethics ensures employees attend office on time and genuinely respect their superiors. Most of the times it has been observed that employees have a hate relationship with their Bosses. Are bosses wrong always? Ask yourself. How would you feel if someone reporting to you is absconding from the office and you have a deadline to follow? Yes, sometimes it does become essential to show your powers and be a little authoritative. Understand that employee ethics is not meant to downgrade employees but make them aware of their duties and responsibilities in the organization.

Most essentially, employee ethics is important as it goes a long way in making the value system of employees strong. This way, employees on their own develop a feeling of attachment and loyalty towards the organization. Remember, employee ethics is not meant to bind you but make you an indispensable employee

2.3.4 Ethical Leadership

Ethical leadership is defined as “leadership demonstrating and promoting ‘normatively appropriate conduct through personal actions and interpersonal relations’.” When you boil it down, this really means that ethical leadership is defined as putting people into management and leadership positions who will promote and be an example of appropriate, ethical conduct in their actions and relationships in the workplace.

In the business world today, ethics are an increasingly important element and point of discussion. So leadership with ethics is very important to understand, to develop, and to recognize in the business world. If you want to become a business leader, learning about ethical leadership is crucial to help you get there. It's your responsibility to model moral behavior in the workplace when you're in a position of power in an organization. Integrity, moral behavior, and ethics are key to being a great leader.

Learn about the value of ethical leadership, how to become an ethical leader, and see examples of leadership with ethics around us in the business world today.

Leadership that is ethical is important for a variety of reasons, for customers, employees, and the company as a whole. Leadership skills are crucial to help create a positive ethical culture in a company. Leaders can help investors feel that the organization is a good, trustworthy one. Customers are more likely to feel loyal when they see leaders in place in an organization. Good press is likely to come when there are ethical leaders in an organization. Partners and vendors will similarly feel they can trust and work well with an organization when they see leadership that is ethical displayed.

In the short-term, ethical leaders can help boost employee morale and help them feel excited about their management and their work. It can increase positivity and collaboration in your organization and make everyone feel happier to be at work.

In the long-term, ethical leadership can prevent company scandals, ethical dilemmas, and ethical issues. It can also help organizations gain more partnerships and customers, which can lead to more money at the end of the day. Loyal employees are also a crucial element of long-term success for a business.

At the end of the day, Leadership with ethics and ethical principles have major short-term and long-term benefits for organizations and individuals alike.

There isn’t just one correct way to lead ethically. However, there are some basic elements that are fairly consistent among ethical leaders. Behaving in an ethical manner takes consideration and thought. Developing these traits will help you start on the journey to become an ethical leader. 

• Leads by example. Ethical leaders should have the same expectations for themselves as for those that work for them. Ethical leaders help their employees with daily tasks, so they have an in-depth understanding of what the other workers do and the challenges that can come with their work. These leaders are then able to guide employees as they do their daily tasks. Ethical leaders also show how to be ethical and moral in their own work, which is a crucial example to other employees. When employees see that their leaders are constantly making decisions with integrity and honesty in mind, they are also willing to make those ethical considerations in their work. 

• Willing to evolve. Good leaders need to be able to evolve and adapt to the changes that are sure to come in the business world. As businesses expands, get bought out, merge, and more, adaptability is key for success. Good organizational leaders are willing to take the changes that are coming and meet them head on. This helps encourage employees to be adaptable and evolve with changes as well. Whatever comes for a business, leaders can help steer the ship in a positive and ethical way.

• Respects everyone equally. Respect is a vital element of ethical responsibility. Leaders that are ethical will respect everyone, from their superiors to their employees, equally. Not showing respect to the people around you can quickly create a negative or hostile work environment. It’s a sure way to lose trust and create issues inside your organization. Not showing the same level of respect can make people think they’re being treated unfairly, and can cause even more problems in the workplace. 

• Communicates openly. Leaders who have ethics need to excel at communication to make sure their organization is a place of trust and honesty. Without communication, issues can go undetected for a long time. This can create hostility and distrust in your organization. Leaders who have ethical behavior focus on having good communication that is honest and open with every single person in their organization. 

• Manages stress effectively. Leaders and managers are faced with stressful situations every day, both in their work life and their personal life. It’s not acceptable to take out your personal or even your professional stress on your workers. This is taking advantage of a power dynamic and can create anger, frustration, or fear in your employees. Leaders who have ethics know how to handle their stress in a productive and positive way. Regular outbursts aren’t acceptable and will make your other workers feel stressed as well. Good leaders who practice ethical behavior find ways to deal with their stress, and encourage their employees to improve if needed, in positive, helpful ways. 

• Mediates fairly. A moral leader is an expert in solving problems in a way that is fair to everyone involved. They consider all the opinions and people involved in order to be fair and impartial. Good organizational leaders are compassionate and kind when helping solve problems and issues. They want to make sure everyone can continue to work together well after the disputes are resolved, and are focused on positive interactions moving forward. Employees will trust leaders who practice ethics who they know will listen and care about them.

Reference Books:

1. Laura P. Hartman, Joe DesJardins, Business Ethics, Mcgraw Hill, 2nd Edition

2. C. Fernando, Business Ethics – An Indian Perspective, Pearson, 2010

3. Joseph DesJardins, an Introduction to Business Ethics, Tata McGraw Hill, 2nd Edition