Business Ethics and Corporate Governance | ISC Class 11 Entrepreneurship Notes

This note covers the meaning of business ethics and its significance for stakeholders, the meaning of corporate governance, the role of the National Foundation for Corporate Governance (NFCG), and the purpose of the key Acts and Regulations that govern entrepreneurship in India, including the Companies Act, 2013, the MSMED Act, 2006, the Patents Act, 1970, the Trade Marks Act, 1999, the GST Act, 2017, the Copyright Act, 1957, the Designs Act, 2000, the IT Act, 2000 and the Digital Personal Data Protection Act, 2023.

What is business ethics?

The word 'ethics' has its origin in the Greek word meaning character, norms, ideals or morals prevailing in a group or society. Business ethics refer to the socially determined moral principles which should govern business activities.

Ethics is concerned with what is right and what is wrong in human behaviour, judged on the basis of a standard form of conduct approved by society in a particular field of activity.

Ethical standards are often written into law, but ethical behaviour is just and fair conduct which goes beyond merely observing laws and government regulations.

It means adhering to moral principles, being guided by particular values, and behaving in the way people ought to act.

Examples of business ethics include charging fair prices from customers, using fair weights for measuring commodities, giving fair treatment to workers, and earning reasonable profits.

Definition: Business ethics. "Business ethics refer to the socially determined moral principles which should govern business activities."

Why is business ethics significant for a business?

Ethical conduct matters to a business for several linked reasons. Stakeholder confidence grows when owners, workers, customers, suppliers and the government see that a firm deals with them honestly; people cooperate more readily with an enterprise they trust.

Ethical business behaviour "improves public image, earns people's confidence and trust, and leads to greater success", and ethics and profits go together in the long run.

Transparency is encouraged when a firm publishes a written code of conduct covering honesty, product safety and quality, fair selling practices and financial reporting, and sets up mechanisms such as regular audits and channels for employees to report unethical behaviour.

This openness makes it harder to hide wrongdoing and easier for stakeholders to judge the firm fairly.

Goodwill is built because a business that is seen to behave with integrity in dealing with others develops a culture of caring for people and the environment, which enhances its reputation over time.

Finally, ethical conduct supports a conducive work environment, since involving employees at all levels in ethics programmes and treating them fairly builds cooperation rather than resentment inside the organisation.

Together, these four effects make ethical behaviour valuable both in itself and for the durable success of the enterprise.

What is corporate governance?

Corporate governance is the system of rules, practices and processes by which a company is directed and controlled.

It sets out how responsibilities and rights are distributed among the different participants in the company, such as the board of directors, managers, shareholders and other stakeholders, and it spells out the rules and procedures for making decisions on corporate affairs.

Good corporate governance tries to balance the interests of a company's many stakeholders, including shareholders, management, customers, suppliers, financiers, the government and the community, so that no single group's interest is served at the unfair expense of another.

In an entrepreneurial context, corporate governance matters even for a young or growing firm, because investors, lenders and partners are more willing to commit resources to a business that is run with clear accountability, fair dealing and sound internal controls.

Weak governance, by contrast, can lead to mismanagement, fraud, and loss of investor confidence, which can threaten the survival of even a promising enterprise.

Definition: Corporate governance. The system of rules, practices and processes by which a company is directed and controlled, balancing the interests of its many stakeholders.

What is the role of the National Foundation for Corporate Governance (NFCG)?

The NFCG is a body in India set up to promote good corporate governance practices among Indian companies.

Its key roles cover five broad areas: promoting good governance, carrying out research and development on governance practices, building the capacity of directors and professionals through training, developing policy and governance frameworks, and acting as an accreditation centre for governance standards.

Through these functions, the NFCG works with regulators, professional institutes and industry bodies to spread awareness of governance norms, to train company directors and officers in their responsibilities, and to recognise companies and individuals who follow sound governance practices.

For an entrepreneur, understanding the purpose of such a body is useful because it signals the standards of accountability, disclosure and fair dealing that a growing enterprise is expected to work towards, especially once it takes outside investment or converts into a company.

Note: The NFCG's work spans five areas: promoting good governance, research and development, capacity building, policy and framework development, and acting as an accreditation centre.

What are the key Acts and Regulations governing entrepreneurship in India?

An entrepreneur in India has to work within a framework of laws covering the form of the business, its intellectual property, its taxation, its use of information technology, and its handling of personal data.

A basic understanding of the purpose of each of these Acts helps an entrepreneur know which protections are available and which compliances are required.

What does the Companies Act, 2013 provide for entrepreneurs?

The Companies Act, 2013 is the main law governing the incorporation and functioning of companies in India. It was passed by both Houses of Parliament and received the assent of the President of India in August 2013.

An entrepreneur who chooses to register the business as a company must follow its rules on formation, management, shareholder rights and reporting.

The Act is also important for Corporate Social Responsibility (CSR), which is governed by Section 135.

The CSR provisions apply to companies with an annual turnover of ₹1,000 crore and more, or a net worth of ₹500 crore and more, or a net profit of ₹5 crore and more.

Such companies must set up a CSR committee of their board, including at least one independent director, and the Act requires them to spend at least 2% of their average net profit of the previous three years on CSR activities.

The indicative activities that qualify as CSR are specified under Schedule VII of the Act, and only activities undertaken in India count, while activities meant exclusively for a company's own employees and their families do not qualify.

What do the MSMED Act, 2006 and the Patents Act, 1970 provide?

The MSMED Act, 2006 (Micro, Small and Medium Enterprises Development Act) came into force from October 2006.

It addresses issues relating to the definition of micro, small and medium enterprises, and to their credit, marketing and technology upgradation, bringing them under a single legal framework.

Medium scale enterprises and service-related enterprises also come under the purview of this Act, which is important because MSMEs form a large part of India's entrepreneurial base.

The Patents Act, 1970 protects scientific inventions, both products and processes, which show a technical advance over what is already known.

For an invention to be patentable it must be new, non-obvious to a person skilled in the relevant field, and capable of industrial application.

A patent grants the inventor an exclusive right to exclude others from making, using, selling or importing the invention for a period of 20 years, and others may use it only with the patentee's permission, usually for a fee, which is called licensing.

Certain things cannot be patented under Sections 3 and 4 of the Act, including mere scientific principles, abstract theories, frivolous inventions and matters prejudicial to morality or public health.

What do the Trade Marks Act, 1999, Copyright Act, 1957 and Designs Act, 2000 protect?

The Trade Marks Act, 1999 protects a word, name, symbol or combination used to identify the goods or services of one business and distinguish them from a competitor's.

Registration of a trademark is not mandatory, but registering it helps establish exclusive rights over the mark and makes it easier to act against a competitor using a deceptively similar mark.

The Copyright Act, 1957 covers works such as literary, artistic, musical, dramatic and cinematographic creations, as well as sound recordings. Copyright gives the creator an exclusive right to prohibit unauthorised reproduction or distribution of the work.

Its protection arises automatically as soon as the work is created, and registration, while not mandatory, becomes useful in case of an infringement dispute.

The Designs Act, 2000 protects the shape, pattern, or arrangement of lines or colours applied to an article, giving legal protection to its aesthetic or eye-catching appearance rather than its function.

This protection lasts for ten years and can be renewed for a further five years, after which the design passes into the public domain and is free for anyone to use.

What do the GST Act, 2017, IT Act, 2000 and Digital Personal Data Protection Act, 2023 regulate?

The GST Act, 2017 replaced several earlier indirect taxes with a single tax on the supply of goods and services across India, aiming to create one common national market and reduce the compliance burden of dealing with multiple state and central taxes separately.

For a new entrepreneur, understanding GST registration and filing is a basic part of starting and running a business legally.

The IT Act, 2000 gives legal recognition to electronic transactions, electronic records and digital signatures, which allows entrepreneurs to carry out contracts, invoicing and payments online with legal validity. It also defines and penalises computer-related offences, which protects businesses that depend on digital systems from cybercrime.

The DPDP Act, 2023 (Digital Personal Data Protection Act) regulates how a business collects, stores, processes and shares the digital personal data of individuals.

It generally requires an organisation to obtain a person's consent before processing their personal data and gives individuals rights over how their data is used, which is increasingly relevant for entrepreneurs running e-commerce, app-based or data-driven ventures.

What are the advantages of ethical conduct and good corporate governance?

An enterprise that practises business ethics and good corporate governance gains in several ways. It earns people's confidence and trust, which improves its public image and reputation over time.

Ethical firms are also better placed to attract investors and lenders, since sound governance signals accountability and reduces the perceived risk of fraud or mismanagement.

A firm with a published code of conduct and working compliance mechanisms, such as regular audits and channels for reporting unethical behaviour, is better able to detect problems early, before they become costly.

Involving employees at all levels in ethics programmes also tends to build a more cooperative, conducive work environment, which supports productivity.

Over the long run, ethics and profits go together, since a business that behaves responsibly is less likely to face regulatory penalties, boycotts, or loss of goodwill, and more likely to achieve durable success.

What are the limitations in practising business ethics and corporate governance?

Despite its advantages, maintaining high ethical and governance standards has real difficulties. Written codes of ethics and compliance mechanisms take time, money and management attention to design and enforce, and small or newly started enterprises may not have the resources to build elaborate systems.

It is also difficult to measure the end results of an ethics programme accurately, even though firms can audit compliance with their own standards.

A further limitation is that ethical standards are not always codified into law, so following them can remain a matter of voluntary action; a firm that chooses profit over principle in the short run may still succeed if competitors or regulators do not act.

Top management commitment is essential for an ethics or governance programme to work, and where that commitment is only lip service rather than genuine, codes of conduct and committees can become a formality rather than a real safeguard for stakeholders.

Glossary

• Business ethics — the socially determined moral principles which should govern business activities.
• Corporate governance — the system of rules, practices and processes by which a company is directed and controlled.
• NFCG — the National Foundation for Corporate Governance, which promotes good governance practices in India.
• Stakeholder — any person or group, such as shareholders, workers, customers or government, affected by a firm's decisions.
• Code of conduct — a written document setting out an organisation's principles on honesty, product safety, employment practices and reporting.
• Corporate Social Responsibility (CSR) — the obligation on large companies, under the Companies Act, 2013, to spend part of their profit on specified social activities.
• Schedule VII — the part of the Companies Act, 2013 that lists the activities a company may undertake as CSR.
• MSME — Micro, Small and Medium Enterprises, defined and governed under the MSMED Act, 2006.
• Patent — an exclusive right granted for a new, non-obvious and industrially applicable invention under the Patents Act, 1970.
• Trademark — a word, name or symbol registered under the Trade Marks Act, 1999 to distinguish one trader's goods from another's.
• Copyright — the exclusive right, under the Copyright Act, 1957, to prevent unauthorised copying of a literary, artistic or musical work.
• Design — the shape, pattern or ornamentation of an article, protected under the Designs Act, 2000 for ten years, renewable by five.
• GST — Goods and Services Tax, a single indirect tax on the supply of goods and services under the GST Act, 2017.
• Digital signature — an electronic method of signing a document, given legal recognition under the IT Act, 2000.
• Personal data — information about an identifiable individual, whose processing is regulated under the Digital Personal Data Protection Act, 2023.

Common errors and misconceptions

• Misconception: Business ethics is the same as legal responsibility. Correct: Ethical behaviour goes beyond merely following laws; it involves voluntary moral conduct even where no law requires it.
• Misconception: Corporate governance only concerns large listed companies. Correct: Any growing enterprise benefits from clear, accountable rules for directing and controlling the business, especially before it takes outside investment.
• Misconception: CSR spending under the Companies Act, 2013 is compulsory for every company. Correct: The CSR provisions apply only to companies crossing specified turnover, net worth or net profit thresholds.
• Misconception: A patent and a copyright protect the same kind of work. Correct: A patent protects a new invention, while copyright protects original literary, artistic, musical or cinematographic works.
• Misconception: Registering a trademark or copyright is always compulsory before any protection exists. Correct: Copyright protection and, to an extent, trademark use arise even without registration, though registration strengthens the owner's rights in a dispute.
• Misconception: The GST Act, 2017 is a direct tax on business profits. Correct: GST is an indirect tax on the supply of goods and services, not on income or profit.
• Misconception: The NFCG makes laws on corporate governance. Correct: The NFCG promotes good governance through research, training, policy development and accreditation; it does not itself enact legislation.

Exam-style questions with model answers

Q1. State the meaning of business ethics. [2 marks]

1. Business ethics refer to the socially determined moral principles which should govern business activities, covering what is right or wrong in a firm's conduct towards society, going beyond mere legal compliance to include voluntary, fair dealing.

Q2. State any two reasons why business ethics is significant for an enterprise. [2 marks]

1. Ethical conduct builds stakeholder confidence, since customers, workers and investors are more willing to deal with a firm they trust, which improves its long-term success.
2. It builds goodwill and a good public image, since ethical behaviour earns people's confidence and improves the firm's reputation over time.

Q3. Explain any four elements of business ethics that help a firm foster ethical conduct in its day-to-day working. [4 marks]

1. Top management commitment: the Chief Executive Officer and senior managers must be openly and strongly committed to ethical conduct, giving continuous leadership for the organisation's values.
2. Publication of a code: a written document setting out principles on honesty, product quality, workplace safety, conflicts of interest and fair selling practices.
3. Compliance mechanisms: recruiting with attention to ethics, training employees in ethics, auditing performance regularly, and giving employees a way to report unethical behaviour.
4. Involving employees at all levels: since employees implement ethics policies in practice, small groups can discuss the firm's ethics policies and examine attitudes towards them.

Q4. Name the key role areas of the National Foundation for Corporate Governance (NFCG) in India. [4 marks]

1. Promoting good governance practices among companies and professionals.
2. Carrying out research and development on governance standards.
3. Building the capacity of directors and professionals through training.
4. Developing policy and governance frameworks, and acting as an accreditation centre for governance standards.

Q5. Explain the basic purpose of any five Acts/Regulations governing entrepreneurship in India. [5 marks]

1. Companies Act, 2013: governs the incorporation, management and winding up of companies and requires large companies to spend on CSR under Section 135.
2. MSMED Act, 2006: defines micro, small and medium enterprises and provides a single legal framework for their credit, marketing and technology upgradation.
3. Patents Act, 1970: grants an inventor an exclusive right to a new, non-obvious and industrially applicable invention for a limited period.
4. Trade Marks Act, 1999: protects a word, name or symbol used to distinguish one trader's goods or services from another's.
5. GST Act, 2017: applies a single indirect tax on the supply of goods and services across India in place of multiple earlier indirect taxes.

Q6. Distinguish between a patent and a trademark with reference to what each protects and how long the protection lasts. [3 marks]

1. A patent, under the Patents Act, 1970, protects a new, non-obvious and industrially applicable invention; a trademark, under the Trade Marks Act, 1999, protects a word, name or symbol that distinguishes one trader's goods from another's.
2. A patent, under the Patents Act, 1970, grants an exclusive right for 20 years, after which the invention passes into the public domain, while a registered trademark can, in principle, be renewed indefinitely and continue to identify the same brand as long as it is used and renewed.
3. Registration of a patent application is necessary to obtain patent rights, whereas trademark registration is not mandatory, though it strengthens the owner's exclusive rights in a dispute.

Q7. "Ethical business is good business." Explain this statement with reference to the significance of business ethics, giving any four reasons. [6 marks]

1. Stakeholder confidence: when customers, workers, investors and suppliers trust that a firm deals with them honestly, they cooperate more readily, which supports the firm's long-term success.
2. Transparency: a published code of conduct and compliance mechanisms, such as regular audits and channels to report unethical behaviour, make it easier for stakeholders to judge the firm fairly and harder to hide wrongdoing.
3. Goodwill: ethical behaviour "improves public image, earns people's confidence and trust, and leads to greater success", building a reputation that a firm can draw on over time.
4. Conducive work environment: involving employees at all levels in ethics policies and treating them fairly builds cooperation inside the organisation rather than resentment.
5. Overall, ethics and profits go together in the long run, so a firm that behaves responsibly is more likely to achieve durable, rather than short-lived, success.

Key takeaways

• Business ethics are the socially determined moral principles which should govern business activities, going beyond mere legal compliance.
• Ethical conduct matters because it builds stakeholder confidence, transparency, goodwill and a conducive work environment.
• Corporate governance is the system of rules and processes by which a company is directed and controlled, balancing stakeholders' interests.
• The NFCG promotes good governance in India through research, capacity building, policy development and accreditation.
• The Companies Act, 2013 governs companies generally and requires large companies to spend on CSR under Section 135 and Schedule VII.
• The MSMED Act, 2006 gives micro, small and medium enterprises a single legal framework for definition, credit and technology upgradation.
• The Patents Act, 1970, Trade Marks Act, 1999, Copyright Act, 1957 and Designs Act, 2000 protect different kinds of intellectual property.
• The GST Act, 2017 applies one indirect tax on goods and services, replacing multiple earlier taxes.
• The IT Act, 2000 and the Digital Personal Data Protection Act, 2023 regulate electronic transactions and personal data respectively.

Test yourself

What does business ethics mean?

The socially determined moral principles which should govern business activities, going beyond mere compliance with law to include voluntary, fair conduct.

Name any two areas through which business ethics benefits a firm.

It builds stakeholder confidence and goodwill, and it supports a transparent, conducive work environment.

What is corporate governance?

The system of rules, practices and processes by which a company is directed and controlled, balancing the interests of its various stakeholders.

What is the NFCG and name two of its roles.

The National Foundation for Corporate Governance; its roles include promoting good governance and capacity building, besides research, policy development and accreditation.

Under which Act is CSR spending required, and from what date did it take effect?

Under Section 135 of the Companies Act, 2013, which received presidential assent in August 2013; the new CSR rules applied from the 2014-15 fiscal year.

What does the MSMED Act, 2006 do?

It defines micro, small and medium enterprises and gives them a single legal framework covering their definition, credit, marketing and technology upgradation.

What must an invention satisfy to be patentable under the Patents Act, 1970?

It must be new, non-obvious to a person skilled in the field, and capable of industrial application.

What does the GST Act, 2017 replace?

It replaces multiple earlier indirect taxes with a single tax on the supply of goods and services across India.