Unit 2: Governance reform and business ethics
Corporate Governance, Ethics and Corporate Social Responsibility notes · PTU syllabus (MCOP303-18)
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Unit summary
India built its governance framework through committees and laws, and ethics underpins it all. This unit covers Indian governance developments — CII code, Kumar Mangalam Birla, Narayana Murthy, Naresh Chandra and J.J. Irani committees, legal and regulatory changes — and business ethics: definition and nature, causes of unethical behaviour, ethics vs morality vs law, ethical theories, ethical dilemmas and codes of ethics.
After this unit you can
- Trace corporate governance reforms in India through committee reports
- Explain legal and regulatory changes — Companies Act 2013 and SEBI LODR
- Explain the nature of business ethics, causes of unethical behaviour and ethical theories
- Explain ethical dilemmas and codes of ethics
PTU syllabus topics
- Indian governance developments — CII
- Kumaramangalam Birla
- Narayana Murthy
- Naresh Chandra and JJ Irani committee reports
- legal and regulatory changes
- definition and nature of ethics
- causes of unethical behaviour
- ethics vs morality vs law
- ethical theories
- ethical dilemmas
- code of ethics
- 1
CII Code (1998)
Voluntary code
- 2
Kumaramangalam Birla Committee (1999)
Led to Clause 49
- 3
Naresh Chandra Committee (2002)
Auditor independence
- 4
Narayana Murthy Committee (2003)
Audit committees, disclosures
- 5
JJ Irani Committee (2005)
Basis of Companies Act 2013
- 6
SEBI LODR (2015)
Current listing rules
Topic 1
Corporate governance developments in India
| Committee / code | Year | Key recommendations |
|---|---|---|
| CII Desirable Corporate Governance Code | 1998 | Voluntary code — independent directors, audit committees, disclosures |
| Kumar Mangalam Birla Committee (SEBI) | 1999 | Clause 49 of the listing agreement — independent directors (one-third/half), audit committee, remuneration committee, MD&A, CG report |
| Naresh Chandra Committee | 2002 | Auditor–company relationship — auditor independence, rotation of audit partners, CEO/CFO certification |
| N.R. Narayana Murthy Committee (SEBI) | 2003 | Strengthened Clause 49 — audit committee role, whistle-blower policy, risk management, independent director definition |
| J.J. Irani Committee | 2005 | Basis for new Companies Act — independent directors, related-party transactions, class actions |
| Kotak Committee (SEBI) | 2017 | Separation of chairperson and MD/CEO for top companies, board diversity, enhanced disclosures |
Topic 2
Legal and regulatory changes
- Companies Act, 2013: independent directors (Section 149, Schedule IV), woman director, audit/nomination and remuneration/stakeholders' relationship/CSR committees, related-party transactions (Section 188), CSR (Section 135), class action suits (Section 245), rotation of auditors, secretarial audit, NFRA (Section 132).
- SEBI (LODR) Regulations, 2015: board composition, committees, RPT approvals, disclosures, BRSR, vigil mechanism.
- Other: SEBI (Prohibition of Insider Trading) Regulations 2015, Stewardship Code for institutional investors (2019), proxy advisory regulation, IBC (2016).
Topic 3
Definition and nature of business ethics
Ethics is the study of moral principles that govern a person's behaviour. Business ethics applies these principles to business conduct — honesty, fairness, integrity and responsibility. Nature: based on moral values, relative to society and time, voluntary yet expected, and wider than law. Purpose: build trust, guide decisions, protect stakeholders and sustain long-term success.
Source
Moral values and conscience
Government and courts
Enforcement
Self and society
Penalties
Scope
Wider: what is right
Narrower: what is legal
Example
Not exaggerating product claims
Not selling expired goods
Topic 4
Causes of unethical behaviour
- Individual factors: greed, personal values, low moral development (Kohlberg's stages), rationalisation.
- Organisational factors: unrealistic targets, pressure from superiors, reward systems that ignore means, weak controls, toxic culture.
- External factors: competition, weak enforcement, corruption, societal norms.
- Rationalisations (Gellerman): "it's not really illegal", "it's in everyone's interest", "no one will find out", "the company will protect me".
Topic 5
Ethics vs morality vs law
Ethics
Systematic reasoning about right conduct (professional/organisational codes)
Self-regulation, professional bodies
Morality
Personal and cultural beliefs about right and wrong
Conscience, society
Law
Rules enacted by the state
Courts, penalties
- Not everything legal is ethical (aggressive tax avoidance), and ethics often goes beyond legal minimums.
Topic 6
Ethical theories
Teleological (consequentialist)
Utilitarianism — greatest good for the greatest number (Bentham, Mill); ethical egoism
Deontological (duty-based)
Kant's categorical imperative — act only on maxims you could will as universal; treat people as ends
Virtue ethics
Aristotle — character traits like honesty, courage, justice
Justice theory
Rawls — fairness, veil of ignorance, difference principle
Rights theory
Respect fundamental rights (life, privacy, free speech)
Indian ethos
Gita's nishkama karma, trusteeship (Gandhi)
Topic 7
Ethical dilemmas and codes of ethics
- Ethical dilemma: a situation where every option involves violating some ethical principle — e.g., reporting a friend's fraud, layoffs vs company survival, gifts from suppliers.
- 1
Recognise the issue
- 2
Get the facts
- 3
Identify stakeholders and options
- 4
Evaluate options
Utilitarian, rights, justice, virtue tests; "newspaper test"
- 5
Decide and act
- 6
Reflect on the outcome
- Code of ethics/conduct: written statement of values and expected behaviour — conflicts of interest, gifts, insider information, fair dealing, harassment, environment; supported by training, ethics officers, hotlines and enforcement.
Example
The Tata Code of Conduct (first issued in 1998) and Infosys's Code of Conduct and Ethics are widely cited Indian examples.
Key terms
- Clause 49
- Listing agreement clause on corporate governance (now SEBI LODR)
- Independent director
- Director without material relationship with the company
- Business ethics
- Application of ethical principles to business decisions
- Utilitarianism
- Ethics judged by the greatest good for the greatest number
- Code of ethics
- Written statement of values and conduct expected
Quick revision
- CII 1998 → Birla 1999 (Clause 49) → Naresh Chandra 2002 → Murthy 2003 → Irani 2005 → Kotak 2017.
- Companies Act 2013 and SEBI LODR 2015 provisions.
- Causes of unethical behaviour: individual, organisational, external.
- Ethics vs morality vs law.
- Theories: utilitarian, Kantian, virtue, justice, rights; dilemma resolution; codes of ethics.
Important exam questions
Practice questions written to the PTU exam pattern for this unit's syllabus: short answers (Section A style) and long answers (Sections B and C style).
Short-answer questions
- Q1.What was Clause 49?
- Q2.State two recommendations of the Narayana Murthy Committee.
- Q3.What is the Naresh Chandra Committee known for?
- Q4.Distinguish ethics and law.
- Q5.What is Kant's categorical imperative?
- Q6.What is an ethical dilemma?
Long-answer questions
- Q1.Trace the evolution of corporate governance in India through various committee reports.
- Q2.Explain the legal and regulatory changes in corporate governance under the Companies Act and SEBI LODR.
- Q3.Explain the causes of unethical behaviour and the relationship between ethics, morality and law.
- Q4.Explain ethical theories and how ethical dilemmas can be resolved.
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