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Management 3% exam weight

Topic 10

Part of the RBI Grade B study roadmap. Management topic manage-010 of Management.

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Topic 10

🟢 Lite — Quick Review (1h–1d)

Rapid summary for last-minute revision before your exam.

  • Business Ethics: Morally right and wrong conduct in business; three main theories — Utilitarianism, Deontology, Virtue Ethics
  • Corporate Governance: System of rules, practices, and processes by which a company is directed and controlled
  • SEBI’s Corporate Governance Guidelines: Independent directors, audit committee, related party transaction norms, CEO/CFO certification
  • CSR (Companies Act 2013): Companies with ₹5 crore+ profit/₹50 crore+ turnover must spend 2% on CSR
  • Stakeholder Theory: Company has responsibilities to all stakeholders, not just shareholders
  • ⚡ Recent RBI guidelines on corporate governance include restrictions on promoter shareholding, board composition requirements

🟡 Standard — Regular Study (2d–2mo)

Standard content for students with a few days to months.

Business Ethics and Corporate Governance

Business ethics and corporate governance have become central to modern management — and nowhere more so than in the banking and financial services sector, where failures in ethics and governance have far-reaching systemic consequences. RBI Grade B officers need to understand both the theoretical foundations and the practical regulatory framework.

What is Business Ethics?

Business ethics is the study of morally appropriate decisions and behaviour in business contexts — what constitutes right and wrong conduct in the business world.

Why Business Ethics Matter:

  1. Trust: Financial system operates on trust — breach of ethics erodes public confidence
  2. Sustainability: Ethical businesses survive longer and build reputation
  3. Legal Compliance: Many ethics norms are now codified in law
  4. Employee Morale: Ethical workplaces attract and retain talent
  5. Financial Performance: Ethical companies often outperform in long run (ESG investing)

Ethical Theories

1. Utilitarianism (Consequentialist Theory)

Core Principle: The morally right action is the one that maximises overall happiness/welfare.

  • Developed by Jeremy Bentham and John Stuart Mill
  • “Greatest good for the greatest number”
  • Application in Banking: A credit policy that extends loans to maximum number of people while managing risk

Criticism: Can justify unethical means for good ends; difficult to measure “utility”

2. Deontology (Duty-Based Theory)

Core Principle: Actions are right or wrong based on adherence to rules, duties, and principles — regardless of consequences.

  • Developed by Immanuel Kant
  • Categorical Imperative: “Act only according to maxims that you could will to become universal laws”
  • Application in Banking: Always tell the truth to customers about product risks, regardless of whether the lie would benefit the bank

Criticism: Absolute duties may conflict; doesn’t always give clear guidance in complex situations

3. Virtue Ethics (Character-Based Theory)

Core Principle: Moral character matters most — the right action is what a virtuous person would do.

  • Rooted in Aristotle
  • Key virtues: Honesty, courage, temperance, justice, prudence, fortitude
  • Application in Banking: A banker who embodies integrity, fairness, and professional excellence

Criticism: Less prescriptive; depends on subjective virtue judgments

Types of Ethical Issues in Business

Bribery and Corruption:

  • Offering or accepting anything of value to influence a business decision
  • Prevention: Whistleblower policies, transparency, third-party due diligence

Conflict of Interest:

  • Personal interests interfere with professional duties
  • Example: A bank officer approving a loan to a family member
  • Prevention: Disclosure requirements, recusal procedures

Insider Trading:

  • Using non-public price-sensitive information for personal gain
  • Regulated by SEBI; criminal offense

Discrimination:

  • Unequal treatment based on protected characteristics (gender, caste, religion, disability)
  • Legal Framework: Equal Remuneration Act, Persons with Disabilities Act, Sexual Harassment Act

Sexual Harassment:

  • Legal Framework: Sexual Harassment of Women at Workplace (Prevention, Prohibition and Redressal) Act, 2013
  • Every company must have an ICC (Internal Complaints Committee)

Corporate Governance — Framework and Principles

Corporate Governance = The system of rules, practices, and processes by which a company is directed and controlled.

OECD Principles of Corporate Governance:

  1. Ensuring the Basis for an Effective Corporate Governance Framework

    • Clear legal and regulatory framework
    • Independent, professional regulators

  2. Rights and Shareholder Protections

    • Voting rights, information rights, preemptive rights

  3. Equitable Treatment of All Shareholders

    • Minority shareholders protected from controlling shareholders

  4. Role of Stakeholders

    • Recognise and respect stakeholder rights; encourage active cooperation

  5. Disclosure and Transparency

    • Timely, accurate disclosure of material information

  6. Responsibilities of the Board

    • Strategic guidance, monitoring management, fiduciary duties

SEBI’s Corporate Governance Requirements (Listing Regulations)

Board Composition:

  • At least 50% should be non-executive directors (for listed companies)
  • At least 1/3 should be independent directors (if chair is non-executive); 50% if chair is executive
  • Woman director mandatory (at least 1)

Board Committees:

Audit Committee:

  • Minimum 3 members; majority independent
  • All members financially literate
  • Independent director with finance expertise as chairman
  • Recommends external auditor appointment; reviews internal audit

Nomination and Remuneration Committee:

  • Formulate criteria for director appointment
  • Recommend remuneration for directors and senior management

Stakeholders’ Relationship Committee:

  • Handle shareholder grievances and complaints

Risk Management Committee:

  • Oversee risk management framework
  • All material RPTs require shareholder approval
  • Audit committee approval for all RPTs
  • No RPT can be material if < ₹5 crore or < 1% turnover (for banks)

CEO/CFO Certification:

  • Annual certification that financial statements are true and fair
  • Quarterly certification on internal controls

Corporate Social Responsibility (CSR)

Companies meeting any of the following in the preceding financial year must constitute a CSR Committee:

  • Net profit > ₹5 crore
  • OR Turnover > ₹100 crore
  • OR Gross assets > ₹50 crore

Minimum CSR Spend: 2% of average net profit of last 3 financial years

CSR Policy: Must be formulated and disclosed; activities listed in Schedule VII of the Act

Permitted CSR Activities:

  • Eradicating hunger, poverty, malnutrition
  • Promoting education, healthcare, gender equality
  • Environmental sustainability
  • Rural development
  • Technical education, digital literacy

Unspent CSR Fund: Must be transferred to a specified fund within 6 months of FY end; persistent non-spending is a criminal offense.

🔴 Extended — Deep Study (3mo+)

Comprehensive coverage for students on a longer study timeline.

Stakeholder Theory vs Shareholder Theory

Shareholder Theory (Milton Friedman):

“The social responsibility of business is to increase its profits.”

  • Primary obligation is to maximise shareholder value
  • Other stakeholders served only when it advances shareholder interests

Stakeholder Theory (R. Edward Freeman):

“Business should create value for all stakeholders, not just shareholders.”

  • Stakeholders include: Shareholders, employees, customers, suppliers, community, environment
  • Managing for all stakeholders produces better long-term outcomes
  • Application in Banking: Bank’s stakeholders include depositors, borrowers, regulators, employees, shareholders, and the broader economy

Corporate Governance Failures — Lessons from History

Satyam Scandal (2009):

  • Founder B. Ramalinga Raju confessed to ₹7,000 crore fraud
  • Inflated cash balances, fictitious revenues, fake receipts
  • Corporate Governance Failure: Board was rubber stamp; audit committee didn’t function; independent directors were nominal
  • Reforms: SEBI tightened norms significantly post-Satyam

IL&FS (Infrastructure Leasing & Financial Services, 2018):

  • Highly leveraged NBFC on brink of collapse
  • CG Failure: Aggressive expansion with inadequate risk management; related party transactions; opaque group structure
  • Impact: Triggered NBFC crisis; RBI and government had to intervene

Whistle-Blowing Mechanisms

Whistle-blowing = Reporting organisational misconduct to authorities or public.

Legal Protection in India:

  • Companies Act 2013 mandates whistle-blower policy
  • Protected under Companies (Meetings of Board and its Powers) Rules, 2014
  • No adverse action against whistle-blower for good faith reporting

Global Standards:

  • Sarbanes-Oxley Act (US) — Section 806 protects corporate whistleblowers
  • Dodd-Frank Act (US) — Financial fraud whistleblowers eligible for 10-30% of sanctions > $1 million

RBI’s Governance Focus for Banks

RBI’s Corporate Governance Guidelines for Banks (2024+):

  • Fit and proper criteria for directors -限制Maximum number of board positions
  • Board committees must meet minimum number of times
  • Risk management committee composition and responsibilities
  • Disclosure of beneficial ownership
  • Prohibition on promoter excess leverage

Prompt Corrective Action (PCA) and Governance:

  • Banks with governance concerns can be placed under PCA even before capital thresholds are breached

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