Importance Of Ethical Practices Accounting Essay

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The concept of Corporate Governance is not a new topic to debate on. In fact, it has been continuously scrutinized and amended since the onset of Industrial Revolution in England either for achieving a more transparent system or for securing human rights by putting numerous stringent rules and regulations in place to comply with. Unfortunately, neither the corporate world can shoulder the burden of an additional mandatory requirement nor the governments can afford to neglect the side effects of the present Corporate Governance policies. This in turn makes it too tricky for any policy maker to suggest anything for improving a system without disturbing the equilibrium between the concerns of the Government and the industry.

Most of the reports that have been followed till today are more or less similar in structure and outdated. Moreover, the recent scams (including LIBOR scam and Rajat Gupta case provide us enough evidence to take some sustainable precautionary measures immediately. Undoubtedly, a value based corporate governance system is both advisable and need of the hour.

This paper examines the same with secondary research on the Tata Group as well as recommends a value set in the form of a matrix abbreviated as 'CARE'. Consequently, the paper provides sufficient scope and a base for further research and improvement on the points so recommended.



Key Words: Corporate Social Responsibility (CSR) | Ethics | Corporate Governance | Tata | India | Committee | CARE By: Shabnam Siddiqui* & Manish Gupta**

Despite whole hearted acceptance of Globalization all over the globe, we are still struggling to find out a universal formula or a structure to govern corporate sector. Different committees have tried to show a path more on the grounds of laws and less on that of ethics. Only a "Lawful Organization" has been defined so far and hence, an "Ethical Organization" is yet to be defined.

Not to forget that the corporate sector of a country has been a prime source of tax collection for its government since the onset of industrial revolution. As a result, the government gives utmost emphasis on concreting the ideal boundaries of laws within which the corporate sector must work. While milking it, the policy makers generally overlook the importance of recommending an ethical framework that can act a roadmap to achieve corporate excellence and which should be followed by an ideal corporate house.


Problem Definition: Values and ethics in simple words mean principle or code of conduct that govern business transaction. These ethics are meant to analyze problems that come up in day to day course of business operations. Apart from this it also applies to individuals who work in organizations, their conduct and to the organizations as a whole. We live in an era of cut throat competition and competition breeds enmity. This enmity reflects in business operations, code of conduct.

This research aims to formulate a value set of ethical corporate governance practices which can assist the corporate sector and the society in reaping long term benefits.

Literature Review: Humera Khan (2011) reviews the extensive literature of corporate governance practices to find out the effectiveness of corporate governance mechanism in the companies and institutions. The paper also focuses on to reduce the principal-agent problem due to the effective corporate governance mechanism in the organizations. The issue of ownership and control and the principal-agent problem and its effect on corporate governance is the main area of research in this review. The findings of the most studies show that effective corporate governance reduces the ownership and control problems and draws a clear line between the shareholder and the manager. Finally from the discussion from all articles this review provides a general overview of principal-agent problem and ownership and control for the researchers and academic practitioners in the domain of corporate governance.

Okeahalam and Akinboade (2003) stated that the organization systems, practices, process and rules of governing institutions are concerned closely with the corporate governance so there is a need to find those relationships that regulate, create or determine the nature of relationship through those relationships.

Farinha (2003) conducted the theoretical and empirical literature review to find out the true nature and consequences of corporate governance. The main focus was to find out the reasons of conflict between manager and shareholders in organizations with respect to ownership mechanism. He also tried to find out the link between the corporate governance and the value of the firm and argued that major problem in organization arises with the relationship of principal and agent relationships and a different approach of manager than the shareholders.

Becher and Campbell (2004) studied the corporate governance of bank mergers and acquisitions and were of a view that during these mergers and acquisitions the CEOs negotiates for their own interests whereas the outside directors of the company face the financial problems.

Novikova (2004) studied the impact of internal corporate governance system on firms innovative activities and addressed the question that how much firms internal corporate governance system varieties with the type and efficiency of firm's innovative activities and listed out major participative actors for the firms which are the board, the shareholders, the managers and the other stakeholders for the companies. He defined the institutions as the rules and procedures use to make decisions on corporate affairs of the firm.

Pushkar Gupta (2008) examines the practices of corporate governance attributes in banking sector and how they adhere to corporate governance practices. The results of this research indicate the practice of corporate governance is at nascent stage although corporate governance practices by Indian Banking Sector are more than a decade. Both private and public sector banks are adhering to mandatory requirements of corporate governance attributes as a result it is bringing more transparency and minimizing the chances of fraud and malpractices.

Research Methodology: After having an overview of the concept of corporate governance and the Indian experience, let us discuss in detail, corporate governance as practiced in the Tata Group. The research involves review of literature pertaining to Tata Group in general and corporate governance at Tata, in particular, which is the secondary data by examining various corporate governance committee reports like Kumar Mangalam Birla Committee report, Cadbury committee report, N R Narayana Murthy; recent journals and magazines; newspapers and books.


It was only in late 1980's and 1990's that both intelligentsia and the academics as well as the corporate began to show interest in the same.

Nowadays almost all organizations lay due emphasis on their responsibilities towards the society and the nature and they call it by different names like corporate social responsibility, corporate governance or social responsibility charter. In India, Maruti Suzuki, for example, owned the responsibility of maintain a large number of parks and ensuring greenery. Hindustan unilever, similarly started the e-shakti initiative for women in rural villages.

Globally also many corporations have bred philanthropists who have contributed compassion, love for poor and unprivileged. Bill gates of Microsoft and Warren Buffet of Berkshire Hathaway are known for their philanthropic contributions across globe.

Many organizations, for example, IBM as part of their corporate social responsibility have taken up the initiative of going green, towards contributing to environmental protection.

There has been renewed interest in the corporate governance practices of modern corporations, particularly in relation to accountability, since the high-profile collapses of a number of large corporations during 2001-2002, most of which involved accounting fraud. Corporate scandals of various forms have maintained public and political interest in the regulation of corporate governance. In the U.S., these include Enron Corporation and MCI Inc. (formerly WorldCom). Their demise is associated with the U.S. federal government passing the Sarbanes-Oxley Act in 2002, intending to restore public confidence in corporate governance. Comparable failures in Australia (HIH, One.Tel) are associated with the eventual passage of the CLERP 9 reforms. Similar corporate failures in other countries stimulated increased regulatory interest (e.g., Parmalat in Italy).


Organizations need to abide by ethics or rule of law, engage themselves in fair practices and competition; all of which will benefit the consumer, the society and organization. Primarily it is the individual, the consumer, the employee or the human social unit of the society who benefits from ethics. In addition, ethics is important because of the following:

Satisfying basic human needs

Creating credibility

Uniting people and leadership

Improving decision making

Long term gains

Securing the society

Corporate governance refers to the set of systems, principles and processes by which a company is governed. They provide the guidelines as to how the company can be directed or controlled such that it can fulfill its goals and objectives in a manner that adds to the value of the company and is also beneficial for all stakeholders in the long term. Stakeholders in this case would include everyone ranging from the board of directors, management, shareholders to customers, employees and society. The management of the company hence assumes the role of a trustee for all the others.

One of the most influential guidelines has been the OECD Principles of Corporate Governance published in 1999 and revised in 2004. The OECD guidelines are often referenced by countries developing local codes or guidelines. Building on the work of the OECD, other international organizations, private sector associations and more than 20 national corporate governance codes formed the United Nations Intergovernmental Working Group of Experts on International Standards of Accounting and Reporting (ISAR) to produce their Guidance on Good Practices in Corporate Governance Disclosure. This internationally agreed benchmark consists of more than fifty distinct disclosure items across five broad categories comprising of 'auditing'; 'board and management structure and process'; 'corporate responsibility and compliance'; 'financial transparency and information disclosure' and 'ownership structure and exercise of control rights'.


Following ethical practices is a win-win situation for a corporate as well as for its stakeholders. But it requires immense managerial will power and patience without which mutual prosperity and growth is merely a hallucination!For Industry: It is to accept that a company runs only if it earns reasonable profit. For shortsighted leaders, means of earning this profit does not matter. However, profit motif should not be the only criteria to judge a company because a company works on the principle of going concern and absence of flexibility only causes dilution as and when a change is needed. This flexibility is the responsibility of top management and can only be gained by taking society, employees and management into confidence. After all, a market consists of buyers and sellers and both are the part and parcel of society. Moreover, increased capacity of a buyer means increased sales and increased profit to a company.

There are plenty of examples like Google, Microsoft, Infosys, Wipro, Tata, Birla, Godrej which have grown exponentially over the years mainly due to the confidence and a sense of loyalty they have developed in their stakeholders by successfully accomplishing numerous CSR projects.

For Society: The ethical framework obviates direct benefit to the society by highlighting the importance of corporate social responsibility which is a concept through which organizations consider the interests of society by taking responsibility for the impact their activities have on customers, suppliers, employees, communities and the environment. This responsibility goes beyond compliance with regulations and is about organizations voluntarily taking further steps to improve the quality of life for employees as well as for the local community and society at large.

There have been number of path breaking initiatives taken by Indian companies only like e choupal (ITC), sports sponsorship (Sahara group), adult literacy software (Wipro and TCS), Prayaas campaign to develop Behavior and social skills (Infosys), Sundesh to reach out to the weaker and more vulnerable sections (Dabur) etc.

Such CSR initiatives have been providing more and more opportunities to the people to contribute progressively in the Gross Domestic Product of their country.


Established in 1907 as Asia's first integrated private sector steel company, Tata Steel Group is amongst the leading steel manufacturers in the world with an annual crude steel capacity of over 28 million tonnes per annum (mtpa).

It is now the world's second-most geographically-diversified steel producer, with operations in 26 countries and a commercial presence in over 50 countries. The Group's vision is to be the world's steel industry benchmark in "Value Creation" and "Corporate Citizenship" through the excellence of its people, its innovative approach and overall conduct. Underpinning this vision is a performance culture committed to aspiration targets, safety and social responsibility, continuous improvement, openness and transparency.

In 2008, Tata Steel India became the first integrated steel plant in the world, outside Japan, to be awarded the Deming Application Prize 2008 for excellence in Total Quality Management.


In their own words, "Tata group is committed to improving the quality of life of the communities we serve. We do this by striving for leadership and global competitiveness in the business sectors in which they operate".

The above words are not just a showpiece or a formality but have been actually practiced in the real world. That is the reason why it acts as an ideal group and the values of which fit best in the CARE matrix as shown in the diagram. The matrix clearly comprises of four chembers or the state of a company with stakeholder's loyalty at its x - axis and perseverance at its y - axis. The arrows represent the ideal path to be followed by a company. Keeping other things constant, A company a company falling in the chamber of compliance keeps itself busy only in complying with the laws that results in high perseverance towards set targets rather than flexibility for greater innovation and openness towards its external environment consisting other than its business activities. Since interaction with society is minimum, the stakeholder's loyalty tends to be least as well.

The companies which follow only the minimum non mandatory recommendations of the corporate governance committee reports, fall under the second category called "Aid". Here, profitability of the company is compromised half heartedly in order to gain popularity among its consumers. Such efforts generally fail to gain stakeholder's loyalty and at the same time divert the attention of the company from showing perseverance towards achieving its sales or profit targets because it needs patience and may be continuos compromise with revenue in order to transit from the second to the third chamber.

The companies with consistent track record of ethical practices enter into the chamber of "Reliance" where they gain considerable goodwill among its stakeholders and soon penetrate the fourth chamber called "Example". Here, the activities of company's interaction and profit sharing with its external environment including stakeholders increases to a great extent because the goodwill earned till now starts paying off its dividends. Here company should set more challenging goals that require both quantity as well as quality. At this stage even a small percentage of company's profit benefits a large number of its loyal stakeholders. This stage has been named as example because here the company sets an example of excellence to its competitiors. In this way, a company should start from a win-lose (Compliance) situation and attain the state of win-win scenario (Example). It is to note that the former is least risk as it is more isolated whereas the latter is the riskiest as it is more involved.


Tata Steel has imbibed this culture better than most. Much before the business world woke up to the importance of evolving a 'method' for corporate governance, Tata Steel had already been practicing its substance. It is no surprise, therefore, that the ministry of finance, Government of India, awarded the company the national award for excellence in corporate governance in 2000. Two years later, Tata Steel bagged the golden peacock award for excellence in corporate governance and corporate social responsibility from the Institute of Directors, an apex association of company directors.

Tata Steel has a three-pronged governance structure that provides for checks and balances throughout its operation. The first layer of this structure is the law of the land. Statutes on the number of non-executive and independent directors, board procedure, and terms of office are followed with rigor.

The second tier of Tata Steel's corporate governance edifice is based on the Tata code of conduct, a comprehensive set of tenets that all Tata employees have to adhere to. Tata Steel has an ethics and compliance committee, as stipulated by the code, and this comprises, among other things, labor welfare measures like the eight-hour working day, leave with pay, provident fund, gratuity and profit sharing. Tata Steel lays plenty of emphasis on communication, the third layer of its corporate governance structure.

Tata Steel, a company synonymous to values - trust, transparency and total Community Care announced on July 20th, 2011 the launch of a corporate campaign "Values Stronger than Steel (VSTS)". The campaign aimed at reaching out to the Indian citizen to reinforce the image of the company as cutting edge, global steel major which is dedicated towards social and economic sustainability, green-technology and community empowerment.

Tata Steel has undertaken a 360 degree approach to promote this campaign all over the country which involves effective use of all the mediums of communication. This is first time ever in the history of the company that a campaign of this scale has been launched.


Established in 1907 became Asia's first integrated private sector steel company. It is now the world's second-most geographically-diversified steel producer, with operations in 26 countries and a commercial presence in over 50 countries. The Tata Steel Group, with a turnover of US$ 26.64 million in FY '11, has over 81,000 employees across five continents and is a Fortune 500 company.

The Group's vision is to be the world's steel industry benchmark in "Value Creation" and "Corporate Citizenship" through the excellence of its people, its innovative approach and overall conduct. Underpinning this vision is a performance culture committed to aspiration targets, safety and social responsibility, continuous improvement, openness and transparency.

In 2008, Tata Steel India became the first integrated steel plant in the world, outside Japan, to be awarded the Deming Application Prize 2008 for excellence in Total Quality Management.


Just one year back, the Tata group with its 30 listed companies was smaller than the Mukesh Ambani-led Reliance group alone. Today, the stock market wealth of the Tata group stands close to Rs 4.4 trillion. This is higher than the combined market wealth of the two Ambani groups put together, which is about Rs 3.67 trillion. Effectively, the Tata group has become the biggest corporate house in the country.

The following points are to be considered for Tatas' to surpass Ambanis: Firstly loyal to Investors. Secondly, management not involved in insider trading & has nothing to do with the share price. Thirdly, healthy dividends with good growth rate. Fourthly, Tata group companies are not family controlled & no individual person's presence or absence has any big effect. Fifthly, honest management & company take lot of pain to choose its top management. Sixthly, has long term vision & not just short term vision. Seventhly, consistent look towards opportunities on how to reduce debt. Eighthly, it did not enter into un-related businesses.

In recent years, the TBEM framework has been adapted to include new business and societal initiatives such as governance, safety, climate change and innovation. The other core elements of the Tata business excellence movement are the Tata Code of Conduct (TCoC), a mandatory pan-Tata policy that defines how Tata employees can conduct themselves, and the Management of Business Ethics, a programme that helps Tata companies drive ethics and values in the organization.

As a result, the business excellence processes have come to characterize the Tata way of enhancing and conducting its business endeavors, and to a great extent, have helped define the Tata brand.

Tata companies look at innovation as a strategic approach to growth and leadership. The Tata group has adopted a three-pronged strategy to encourage and enhance innovation across business sectors, companies and regions.

The three key drivers are better communication and recognition of innovative ideas and efforts; facilities and initiatives that enable learning from other companies; and support for collaborative research and partnerships with academia.

Corporate governance is now the focus area of all business entities. Tatas' are a stalwart and the exemplary performance of Tata Group in the field of corporate governance, with strong code of ethics and excellence in performance is worth being appreciated. It is rightly said about Tatas' 'Good governance has taken root in and spread to all branches of the Tata Group and there is nothing amorphous about that Tatas' have already set high standards for corporate governance which shall be revered, appreciated and followed by the generations to come.


Unlike Reliance, which has been adopting the strategy of "Anything is fair in competition" and its stakeholders might not support it during high tide; Tata group has earned the confidence of its stakeholders and hence turns out to be a better competitor.

Conclusively, a company can no longer afford to deny the enormous importance of ethical aspect along with its financial, legal, social and technological vectors because ethics plays dual role of empowering the society as well as strengthening the pillars of trust on which any business runs. The CARE matrix suggested above provides a holistic view of the past, present and probable future practices of an organization and helps the management of that organization for taking a sound decision.