BGS Module 1-7

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GCEM

2016

Business, Government &

Society

14MBA24

Mr. SRINIVAS S, Assistant Professor,

Department of MBA

GOPALAN COLLEGE OF ENG INEER ING AND

MANAGEMENT

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Business, Government & Society 14MBA24

Department of MBA, GCEM 1

BUSINESS, GOVERNMENT AND SOCIETY

Subject Code : 14MBA24 IA Marks : 50

No. of Lecture Hours / Week : 04 Exam Hours : 03

Total Number of Lecture Hours : 56 Exam Marks : 100

Practical Component : 01 Hour / Week

Objectives:• To enable students to understand the challenges and complexities faced by businesses and their leaders

as they endeavor maximize returns while responsibly managing their duties to stakeholders and society.

• To help students to understand the rationale for government interventions in market systems.

• To help students develop an understanding of Social Responsibility and make their own judgments as to

the proper balance of attention to multiple bottom lines.

• To help students develop the skills needed to work through ethical dilemmas

Module 1: (8 Hours)

The Study of Business, Government and Society (BGS): Importance of BGS to Managers – Models of

BGS relationships – Market Capitalism Model, Dominance Model, Countervailing Forces Model and

Stakeholder Model – Global perspective – Historical Perspective.

Module 2: (8 Hours)Corporate Governance: Introduction, Definition, Market model and control model, OECD on corporate

governance, A historical perspective of corporate governance, Issues in corporate governance, relevance

of corporate governance, need and importance of corporate governance, benefits of good corporate

governance, the concept of corporate, the concept of governance, theoretical basis for corporate

governance, obligation to society, obligation to investors, obligation to employees, obligation tocustomers, managerial obligation, Indian cases

Module 3: (4 Hours)

Public Policies: The role of public policies in governing business, Government and public policy,

classification of public policy, areas of public policy, need for public policy in business and levels of

public policy.

Module 4: (8 Hours)

Environmental concerns and corporations: History of environmentalism, environmental preservation-

role of stakeholders, international issues, sustainable development, costs and benefits of environmental

regulation, industrial pollution, role of corporate in environmental management, waste management and pollution control, key strategies for prevention of pollution, environmental audit, Laws governing

environment.

Module 5: (8 Hours)

Business Ethics: Meaning of ethics, business ethics, relation between ethics and business ethics,

evolution of business ethics, nature of business ethics, scope, need and purpose, importance, approaches

to business ethics, sources of ethical knowledge for business roots of unethical behaviour, ethical decision

making, some unethical issues, benefits from managing ethics at

Workplace, ethical organizations

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Module 6: (6 Hours)

Corporate Social Responsibility: Types and nature of social responsibilities, CSR principles and

strategies, models of CSR, Best practices of CSR, Need of CSR, Arguments for and against CSR, CSR in

Indian perspective, Indian examples.

Module 7: (14 Hours)

Business Law: Law of contract - meaning of contract, agreement, essential elements of a valid contract.

Law of agency- meaning, creation and termination of agency. Bailment and Pledge - meaning, rights and

duties of bailor and bailee.

Sale of Goods Act 1930: Definition of Sale, Sale v/s Agreement to Sell, Goods, Condition and

Warranties, Express and Implied Condition, “Doctrine of Caveat Emptor”, Right and duties of Unpaid

Seller. Meaning, scope and objectives of - Intellectual property law, law relating to patents, law relating

to copyrights, law relating to trade mark.

Practical Components:• Students are expected to study any five CSR initiatives by Indian organizations and submit a report fo r

the same.

• A group assignment on “The relationship between Business, Government and Society in

Indian Context and relating the same with respect the models studied in Module 1.

• Case studies/Role plays related ethical issues in business with respect to Indian context.

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MODULE 01

BUSINESS, GOVERNMENT AND SOCIETY

The Study of Business, Government and Society (BGS): I mportance of BGS to Managers – Models of

BGS relationships – Market Capitali sm Model, Dominance Model, Coun tervail ing Forces Model and

Stakeholder Model – Global perspective – H istorical Perspective.

Introduction to BGS

What is the business-government-society (BGS) f ield and what is its importance?

In the universe of human endeavor, we can distinguish subdivisions of economic, political, and

social activity — that is, business, government, and society — in every civilization throughout time.

Interplay among these activities creates an environment in which businesses operate.

The business – government – society (BGS) field is the study of this environment and its importancefor managers. To begin, we define the basic terms.

Business is a broad term encompassing a range of actions and institutions. It covers management,

manufacturing, finance, trade, service, investment, and other activities. The fundamental purpose of

every business is to make a profit by providing products and services that satisfy human needs.

Government refers to structures and processes in societies that authoritatively make and apply

policies and rules. Like business, it encompasses a wide range of activities and institutions at many

levels, from international to local. The focus of this book is on the economic and regulatory powers

of government as they affect business.

A society is a network of human relations that includes three interacting elements:(1) Ideas, (2) institutions, and (3) material things.

I deas: or intangible objects of thought include values and ideologies. Values are enduring beliefs about which fundamental choices in personal and social life are correct. Cultural habits

and norms are based on values. Ideologies — for example democracy and capitalism — are

bundles of values that create a certain world view. They establish the broad goals of life by

defining what is considered good, true, right, beautiful, and acceptable. Ideas shape every

institution in a society.

Institutions are formal patterns of relations that link people together to accomplish a goal.

They are essential to coordinate the work of individuals who have no personal relationship

with each other. In modern societies, economic, political, cultural, legal, religious, military,

educational, media, and familial institutions are salient. There are multiple economic

institutions including financial institutions, the corporate form, and markets. Collectively, we

call this business.

Material things are the tangible artifacts of a society.

To succeed in meetings its objectives a business must be responsive to both its economic and its

noneconomic environment.

Recognizing that a company operates not only within markets but within a society is critical.

A basic agreement or social contract exists between the business institution and society.

Managers must respect and adhere to society’s expectations.

This contract defines the broad duties that business must perform to retain society’s support, but

these duties are often ambiguous.

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FOUR MODELS OF THE BGS RELATIONSHIP Interactions among business, government, and society are infinite and their meaning is open to

interpretation. Faced with this complexity, many people use simple mental models to impose order and

meaning on what they observe. These models are like prisms, each having a different refractive quality,

each giving the holder a different view of the world. Depending on the model (or prism) used, a person

will think differently about the scope of business power in society, criteria for managerial decisions, the

extent of corporate responsibility, the ethical duties of managers, and the need for regulation.

The following four models are basic alternatives for seeing the BGS relationship. As abstractions

they oversimplify reality and magnify central issues. Each model can be both descriptive and prescriptive;

that is, it can be both an explanation of how the BGS relationship does work and, in addition, an ideal

about how it should work.

Market Capitalism model

The market capitalism model depicts business as operating within a market environment,

responding primarily to powerful economic forces.

The market acts as a buffer between business and nonmarket forces.

The market capitalism model depicts the relationship as a set of arrangements in accord with the

assumptions of classical capitalism. It is assumed that social responsibility is measured primarily

as economic performance that enhances social welfare.

Criticism of market capitalism model

It leads to inequalities of wealth and income.

It encourages exploitation of workers.

Capitalist nations engage in imperialism to spread markets.

Markets erode virtue.

Money and material objects get too much emphasis.

Conspiracies and monopoly appear.

It is characterized by environmental pollution and resource exploitation.

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Important assumptions of the market capitalism model:

Government interference in economic life is slight (laissez-faire).

Individuals can own private property and freely risk investments.

Consumers are informed about products and prices and make rational decisions.

Moral restraint accompanies the self-interested behavior of business.

Basic institutions such as banking and laws exist to ease commerce.

There are many producers and consumers in competitive markets.

Critiques of the Market Capitalism Model:

Increased prosperity comes at the cost of increased inequality.

Results in base values being energized and virtue being eroded.

The BGS relationship according to the Market Capitalism Model:

Government regulation should be limited.

Markets discipline private economic activity to promote social welfare.

The proper measure of corporate performance is profit.

The ethical duty of management is to promote the interests of shareholders.

Explanation of market capitali sm model

The market capitalism model, shown in Figure depicts business as operating within a market

environment, responding primarily to powerful economic forces. There, it is substantially sheltered from

direct impact by social and political forces. The market acts as a buffer between business and non

market forces. To appreciate this model, it is important to understand the history and nature of markets

and the classic explanation of how they work. Markets are as old as humanity, but for most of recorded

history they were a minor institution. People produced mainly for subsistence, not to trade. Then, in the

1700s, some economies began to expand and industrialize, division of labour developed within them, and people started to produce more for trade. As trade grew, the market, through its price signals, took on a

more central role in directing the creation and distribution of goods. The advent of this kind of market

economy, or an economy in which markets play a major role, reshaped human life.

Classic explanation of how a market economy works comes from the Scottish professor of moral

philosophy Adam Smith (1723 – 1790). In his extraordinary treatise, The Wealth of Nations, Smith wrote

about what he called “commercial society” or what today we call capitalism. He never used that word. It

was adopted later by the socialist philosopher Karl Marx (1818 – 1883), who contrived it as a term

of pointed insult. But it caught on and soon lost its negative connotation. Smith said that the desire to

trade for mutual advantage lay deep in human instinct. He noted that the growing division of labour in

society led more people to try to satisfy their self-interests by specializing their work, then exchanginggoods with each other. As they did so, the market's pricing mechanism reconciled supply and

demand, and its ceaseless tendency was to make commodities cheaper, better, and more available.

The beauty of this process, according to Smith, was that it coordinated the activities of strangers

who, to pursue their selfish advantage, were forced to fulfill the needs of others. In Smith's words, each

trader was “led by an invisible hand to promote an end which was no part of his intention,” the collective

good of society. Through markets that harnessed the constant energy of greed for the public welfare,

Smith believed that nations would achieve “universal opulence.” His genius was to demystify the way

markets work, to frame market capitalism in moral terms, to extol its virtues, and to give it lasting

justification as a source of human progress. The greater good for society came when businesses competed

freely.

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In Smith's day producers and sellers were individuals and small businesses managed by their

owners. Later, by the late 1800s and early 1900s, throughout the industrialized world, the type of

economy described by Smith had evolved into a system of managerial capitalism. In it the innumerable,

small, owner-run firms that animated Smith's marketplace were overshadowed by a much smaller number

of dominant corporations run by hierarchies of salaried managers. These managers had limited ownership

in their companies and worked for shareholders. This form of capitalism has now spread throughout the

world. Nowhere does it work exactly like Smith's theory. Nevertheless, the market capitalism model

continues to exist as an ideal against which to measure practice.

The model incorporates important assumptions. One is that government interference in economic

life is slight. This is called laissez-faire, a term first used by the French to mean that government should

“let us alone.” It stands for the belief that government intervention in the market is undesirable. It is

costly because it lessens the efficiency with which free enterprise operates to benefit consumers. It is

unnecessary because market forces are benevolent and, if liberated, will channel economic resources to

meet society’s needs. It is for governments, not businesses, to correct social problems. Therefore,

managers should define company interests narrowly, as profitability and efficiency.

Another assumption is that individuals can own private property and freely risk investments. Under thesecircumstances, business owners are powerfully motivated to make a profit. If free competition exists, the

market will hold profits to a minimum and the quality of products and services will rise as firms try to

attract more buyers. If one enterprise tries to increase profits by charging higher prices, consumers will go

to a competitor. If one producer makes higher-quality products, others must follow. In this way, markets

convert selfish competition into broad social benefits.

Other assumptions include these: Consumers are informed about products and prices and make

rational decisions. Moral restraint accompanies the self-interested behavior of business. Basic institutions

such as banking and laws exist to ease commerce. There are many producers and consumers in

competitive markets.

The perspective of the market capitalism model leads to these conclusions about the BGS relationship: Government regulation should be limited

Markets discipline private economic activity to promote social welfare

The proper measure of corporate performance is profit

The ethical duty of management is to promote the interests of shareholders.

These tenets of market capitalism have shaped economic values in the industrialized West and, as

markets spread, they do so increasingly elsewhere. There are many critics of capitalism and the market

capitalism model. As promised by its defenders, capitalism has created material progress. Yet there is

trade-offs: It is argued that capitalism creates prosperity only at the cost of rising inequality. Karl Marx

believed that owners of capital exploited workers and used imperialist foreign policies to spread markets.

Others believe that markets erode virtue. The avarice, self-love, and ruthlessness that energize them are

base values that drive out virtues such as love and friendship. Another enduring fear is that markets place

too much emphasis on money and material objects. Pope John Paul II, for example, cautioned against a

“domination of things over people.” Critics see these problems as inherent to markets. Still other

criticisms focus on the flaws that sometimes, perhaps inevitably, appear in them. Without correction they

may reward conspiracies and monopoly. Also, the profit motive has led companies to pollute and plunder

the earth.

All these criticisms of capitalism are pronounced today, but none are new. They represent a series of

recurrent attacks that wind through the Western philosophical tradition. Adam Smith himself had some

reservations and second thoughts. He feared both physical and moral decline in factory workers and theunwarranted idolization of the rich, who might have earned their wealth by unvirtuous methods. In his

later years, he grew to see more need for government intervention. But Smith never envisioned a system

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based solely on greed and self-interest. He expected that in society these traits must coexist with restraint

and benevolence. The ageless debate over whether capitalism is the best means to human fulfillment will

continue. Meanwhile, we turn our discussion to an alternative model of the BGS relationship that attracts

many of capitalism's detractors.

The Dominance Model The dominance model is a second basic way of seeing the BGS relationship. It represents

primarily the perspective of business critics. In it, business and government dominate the great mass of

people. This idea is represented in the pyramidal, hierarchical image of society shown in Figure 1.3.

Those who subscribe to the model believe that corporations and a powerful elite control a system that

enriches a few at the expense of the many. Such a system is undemocratic. In democratic theory,

governments and leaders represent interests expressed by the people, who are sovereign.

Proponents of the dominance model focus on the defects and inefficiencies of capitalism. They

believe that corporations are insulated from pressures holding them responsible, that regulation by a

government in thrall to big business is feeble, and that market forces are inadequate to ensure ethical

management. Unlike other models, the dominance model does not represent an ideal in addition to a

description of how things are. For its advocates, the ideal is to turn it upside down so that the BGS

relationship conforms to democratic principles.

In the United States, the dominance model gained a following during the late nineteenth century

when large trusts such as Standard Oil emerged, buying politicians, exploiting workers, monopolizingmarkets, and sharpening income inequality. Beginning in the 1870s, farmers and other critics of big

business rejected the ideal of the market capitalism model and based a populist reform movement called

populism on the critical view of the BGS relationship implied in the dominance model.

Populism is a recurrent spectacle in which common people who feel oppressed or disadvantaged

in some way seek to take power from ruling elite that thwarts fulfilment of the collective welfare. In

America, the populist impulse bred a socio-political movement of economically hard-pressed farmers,

miners, and workers lasting from the 1870s to the 1890s that blamed the Eastern business establishment

for a range of social ills and sought to limit its power.

This was an era when, for the first time, on a national scale the actions of powerful business

magnates shaped the destinies of common people. Some displayed contempt for commoners. “The public

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be damned,” railroad magnate William H. Vanderbilt told a reporter during an interview in his luxurious

private railway car. The next day, newspapers around the country printed his remark, enraging the public.

Later, Edward Harriman, the aloof, arrogant president of the Union Pacific Railroad, allegedly reassured

industry leaders worried about reform legislation, saying “that ‘could buy Congress’ and that if necessary

he ‘could buy the judiciary.’” It was with respect to Harriman that President Theodore Roosevelt once

noted that “men of very great wealth in too many instances totally failed to understand the temper of the

country and its needs.

The populist movement in America ultimately fell short of reforming the BGS relationship to a

democratic ideal. Other industrializing nations, notably Japan, had similar populist movements. Marxism,

an ideology opposed to industrial capitalism, emerged in Europe at about the same time as these

movements, and it also contained ideas resonant with the dominance model. In capitalist societies,

according to Karl Marx, an owner class dominates the economy and ruling institutions. Many business

critics worldwide advocated socialist reforms that, based on Marx's theory, could achieve more equitable

distribution of power and wealth.

In the United States the dominance model may have been most accurate in the late 1800s when itfirst arose to conceptualize a world of brazen corporate power and politicians who openly represented

industries. However, it remains popular. Ralph Nader, for example, speaks its language. Over the past 20

years, big business has increasingly dominated our political economy. This control by corporate

government over our political government is creating a widening “democracy gap.” The unconstrained

behavior of big business is subordinating our democracy to the control of a corporate plutocracy that

knows few self-imposed limits to the spread of its power to all sectors of our society.

The Countervailing Forces Model The countervailing forces model, shown in Figure 1.4, depicts the BGS relationship as a flow of

interactions among the major elements of society. It suggests complex exchanges of influence among

them, attributing dominance to none. This is a model of multiple or pluralistic forces. Their strengthwaxes and wanes depending on factors such as the subject at issue, the power of competing interests, the

intensity of feeling, and the influence of leaders. The counter- with democratic traditions. It differs from

the market capitalism model, because it opens business directly to influence by non market forces. Many

important interactions implied in it would be evaluated as negligible in the dominance model.

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What overarching conclusions can be drawn from this model?

1. Business is deeply integrated into an open society and must respond to many forces, both economic

and non economic It is not isolated from its social environment, nor is it always dominant.

2. Business is a major initiator of change in society through its interaction with government, its

production and marketing activities, and its use of new technologies.

3. Broad public support of business depends on its adjustment to multiple social, political, and economic

forces. Incorrect adjustment leads to failure. This is the social contract at work.

4. BGS relationships continuously evolve as changes take place in the main ideas, institutions, and

processes of society.

The Stakeholder Model The stakeholder model in Figure 1.5 shows the corporation at the center of an array of mutual

relationships with persons, groups, and entities called Stakeholders. Stakeholders are those whom the

corporation benefits or burdens by its actions and those who benefit or burden the firm with their actions.

A large corporation has many stakeholders. These can be divided into two categories based on the natureof the relationship. But the assignments are relative, approximate, and inexact. Depending on the

corporation or the episode, a few stakeholders may shift from one category to the other.

Primary stakeholders are a small number of constituents for which the impact of the relationship

is immediate, continuous, and powerful on both the firm and the constituent. They are stockholders

(owners), customers, employees, communities, and governments and may, depending on the firm, include

others such as suppliers or creditors.

Secondary stakeholders include a possibly broad range of constituents in which the relationship

involves less mutual immediacy, benefit, burden, or power to influence. Examples are activist groups,

trade associations, and schools. Exponents of the stakeholder model debate how to identify who or whatis a stakeholder. Some use a broad definition and include, for example, natural entities such as the earth's

atmosphere, oceans, terrain, and living creatures because corporations have an impact on them. Others

reject this broadening, since natural entities are represented by conventional stakeholders such as

environmental groups. Some include competitors because, although they do not work to benefit

The firm, they have the power to affect it. At the furthest reaches of the stakeholder idea lie

groups such as the poor and future generations. But in the words of one stakeholder advocate, stakeholder

theory should not be used to weave a basket big enough to hold the world's misery.” If groups such as the

poor were included in the stakeholder network, managers would be morally obliged to run headlong at

endless problems, taking them beyond any conceivable economic mission.

The stakeholder model reorders the priorities of management away from those in the market

capitalism model. There, the corporation is the private property of those who contribute its capital. Its

immediate priority is to benefit one group — the investors. The stakeholder model, by contrast, is an

ethical theory of management in which the welfare of each stakeholder must be considered as an end.

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Stakeholder interests have intrinsic worth; they are not valued only to the extent that they enrich

investors. Managers have a duty to consider the interests of multiple stakeholders, and because of this,

“the interests of share owners . . . are not always primary and never exclusive.” Stakeholder management,

then, creates duties toward multiple constituents of the corporation — duties not emphasized in the practiceof market capitalism, which tends toward domination of the environment and enrichment of share

owners Management must raise its gaze above profits to see and respond to a spectrum of other values.

One group of scholars, for example, urges that corporations “should adopt processes and modes of

behavior that are sensitive to the concerns and capabilities of each stakeholder constituency.” The

stakeholder model is intended to redefine the corporation.

It rejects the shareholder-centered view of the firm in the market capitalism model as “ethically

unacceptable.” Not everyone agrees. Critics of the stakeholder model argue that it is not a realistic

assessment of power relationships between the corporation and other entities.

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It seeks to give power to the powerless by replacing force with ethical duty, a timeless and often

futile quest of moralists. In addition, it sets up too vague a guideline to substitute for the yardstick of

profits for investors. Unlike traditional criteria such as return on capital, there is no single, clear, and

objective measure to evaluate the combined ethical/economic performance of a firm. According to one

critic, this lack of a criterion “would render impossible rational management decision making for there is

simply no way to adjudicate between alternative projects when there is more than one bottom line.” 35 In

addition, the interests of stakeholders so vary that often they conflict with shareholders and with one

another. With respect to corporate actions, laws and regulations protect stakeholder interests. Creating

surplus ethical sensitivity that soars above legal duty is impractical and unnecessary.

Some puzzles exist in stakeholder thinking. It is not clear who or what is a legitimate stakeholder,

to what each stakeholder is entitled, or how managers should balance competing demands among a range

of stakeholders. Yet its advocates are compelled by two arguments. First, a corporation that embraces

stakeholders performs better. A corporation better sustains its wealth-creating function with the support of

a network of parties beyond shareholders. Put bluntly by one advocate of the stakeholder perspective,executives ignore stakeholders at the peril of the survival of their companies.” Second, it is the ethical

way to manage because stakeholders have moral rights that grow from the way powerful corporations

affect them. Irrespective of academic debates, in practice many large corporations have adopted methods

and processes to analyze their stakeholders and engage them.

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MODULE 02

CORPORATE GOVERNANCE

Introduction, Definition, Market model and control model, OECD on corporate governance, A historical

perspective of corporate governance, Issues in corporate governance, relevance of corporate

governance, need and importance of corporate governance, benefits of good corporate governance, the

concept of corporate, the concept of governance, theoretical basis for corporate governance, obligation

to society, obligation to investors, obligation to employees, obligation to customers, managerial

obligation.

Introduction: -

In the beginning of the new millennium, several companies in the USA and elsewhere faced

collapse because of corporate misgovernance and unethical practices they indulged in.

In India, the governance of most of the country’s industrial and business organisations thrived on

unethical practices at the market place and showed scant regard for the timeless human andorganisational values while dealing with their shareholders, employees and other stakeholders.

An overwhelmingly large number of Indian corporations used several illegal tactics such as

cornering of industrial licenses with a view to keeping away competitors, using import licenses to

make a quick profit, illegally holding money abroad, and indulging in bribery, corruption and

other unethical practices.

The reasons for the corporate misgovernance in India for over 40 years – 1951 to 1991, are: -

o A closed economy

o A sheltered market

o Limited need and access to global business

o Lack of competitive spirit

o

Inefficient regulatory framework. In the aftermath of the economic liberalisation in India, corporate governance gained greater

importance in the country.

Definition of corporate governance

Corporate governance is typically perceived by academic literature as dealing with “problems that

result from the separation of ownership and control.” From the perspective, corporate governance would

focus on: - the internal structure and rules of the board of directors, the creation of independent audit

committees, rules for disclosure of information to shareholders and creditors, and control of the

management.

Corporate governance has also been defined as "a system of law and sound approaches by which

corporations are directed and controlled focusing on the internal and external corporate structures with the

intention of monitoring the actions of management and directors and thereby justifying agency risks

which may stem from the misdeeds of corporate officers.

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Market model of corporate governance

The market model is efficient, well-developed equity markets and dispersed ownership, something

common in the developed industrial nations such as USA, UK, Canada and Australia. Corporate

governance is basically how companies deal fairly with problems that arise from “separation of

ownership and effective control.” This model illustrates conditions and governance practices that are

better understood and appreciated and as such highly valued by sophisticated global investors.

Control model of corporate governance

The control model is represented by underdeveloped equity markets, concentrated ownership, less

shareholder transparency and inadequate protection of minority and foreign shareholders, a paradigm

more familiar in Asia, Latin America and some east European nations. In such transitional and developing

economies there is a need to build, nurture and grow supporting institutions such as a strong and efficient

capital market regulator and judiciary to enforce contracts or protect property rights.

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OECD on Corporate governance

The organisation for economic cooperation and development was one of the earliest non-

governmental organisations to work on the spell out principles and practices that should govern corporate

in their goal to attain long – term shareholder value.

Rights and equitable treatment of shareholders: Organizations should respect the rights of

shareholders and help shareholders to exercise those rights. They can help shareholders exercise their

rights by openly and effectively communicating information and by encouraging shareholders to

participate in general meetings.

Interests of other stakeholders: Organizations should recognize that they have legal, contractual,

social, and market driven obligations to non-shareholder stakeholders, including employees,

investors, creditors, suppliers, local communities, customers, and policy makers.

Role and responsibilities of the board: The board needs sufficient relevant skills and understandingto review and challenge management performance. It also needs adequate size and appropriate levels

of independence and commitment.

Integrity and ethical behavior: Integrity should be a fundamental requirement in choosing corporate

officers and board members. Organizations should develop a code of conduct for their directors and

executives that promotes ethical and responsible decision making.

Disclosure and transparency: Organizations should clarify and make publicly known the roles and

responsibilities of board and management to provide stakeholders with a level of accountability. They

should also implement procedures to independently verify and safeguard the integrity of the

company's financial reporting. Disclosure of material matters concerning the organization should betimely and balanced to ensure that all investors have access to clear, factual information.

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A historical perspective of corporate governance – from a narrow to a broader vision

Corporate governance has focused traditionally on the problem of the separation of ownership by

shareholders and control by management. It is now accepted that firms should respond to the expectations

of more categories of stakeholders, the wide range of corporate governance practices include business

ethics, social responsibility, management discipline, corporate strategy, life-cycle development,

stakeholder participation in the decision-making processes and promotion of sustainable economic

development.

Firms can achieve long run value maximization only if they respond to the externalities such as

product safety, job safety, and environmental impacts have increased the importance and significance of

better governance of corporations to achieve these ends.

Issues in Corporate Governance Corporate governance conveys different meanings to different people. But to all, corporate governance is

a means to an end, the end being long term shareholder value, and more importantly, stakeholder value.Thus, all authorities on the subject are one in recognising the need for good corporate governance

practices to achieve the end for which corporate are formed. They identify some governance issues being

crucial and critical to achieve these objectives. These are: -

Distinguishing the roles of board and management The responsibility for managing the business is delegated by the board to the CEO, who in turn

delegates the responsibility to other senior executives. Thus board occupies a key position

between the shareholders and company’s management. As per this arrangement, the board has the

following functions: -

o Select, decide the remuneration and evaluate on a regular basis, and when necessary,

change the CEOo Review corporate plans and objectives

o Render advice and counsel top management

o All other functions required by law to be performed

Composition and Balance of the Board A feature of many corporate governance scandals has been boards dominated by a single senior

executive or small ‘cabinet of kitchen’ with other member of board who are working just as a robot toy. Itis possible that a single person may bypass the board directions to meet his own personal interests. The

report on the UK Guinness case suggested that the Earnest Saunders’ chief executive paid himself a

reward of £3million without the consent of other directors.

In the case where the organization is not dominated by a single person, there may be other problem in the composition of board of directors. The organization may be run by a minority group

revolve around CEO or CFO and recruitment and appointments may be done by personal

recommendations rather than formal system. So in order to run a smooth business a board must be

balanced in sense of talents, skills, and competence from numerous specialism related to the

organization’s situation and also in terms of age (in order to ensure that senior directors are bringing on

newer ones to assist in the planning of succession).

Remuneration and Reward of Directors Directors being paid excessive bonuses and salaries have been identified as significant corporate

abuses for a large number of years. It is, however, unavoidable that the corporate governance codes have been targeted this significant issue. The key issues are:-

o Transparency

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o Pay for performance

o Process for determination

o Pension for non-executive directors

Reliability of Financial Reporting and External Auditors Financial reporting and auditing issue are seen more critical to corporate governance by the

investors because of their main consideration in ensuring management accountability. It is the reason that

they have been must debated and the focus of serious litigation. Whilst considering the corporate

governance debate only on reporting and accounting issues is insufficient, the greater regulation of

practices such as off-balance sheet financing has directed to greater transparency and a reduction in risks

faced by investors.

The necessary questioning may not be carried out by external auditor from senior management

because the auditors may have threat of loosing audit assignment. In the same way internal auditor may

not ask an alien question to senior member because their employment matters are determined by the CFO.

Board’s Responsibility for Risk Management and Internal Control If the board does not arrange the regular meetings in order to consider the organizational activities

systematically show that the board is not meeting their responsibilities. But this thing also occurred

sometime when the board is not provided by full information to properly oversight on business activities.

All this mess results in the poor system that may unable to report and measure the risks associated with

business.

Shareholders’ Rights and Responsibilities Shareholders’ role and rights is subject of particular importance. They should be info rmed about

all those information that are material to them because this information may influence their amount of

investment. They should also be given the right to vote on policies affecting the governance of

organization.

Corporate Social Responsibility and Business Ethics The lack of mutual decision and sense of responsibility for businesses and stakeholders has

unavoidably turned out the business ethics and social responsibility a significant part of corporate

governance debate.

Relevance of Corporate governanceThe debate and effort in the arena of corporate governance has been tilted mostly in favour of the

publicly listed and widely held companies. The shifting of control when a company’s ownership gets

dispersed underscores the need to create and activate structures and processes by which the owners can

ensure appropriate governance and management. The second factor addressed the need for more efficient

regulation through amendments to listing agreements and company laws as well as updated standards of

accounting, reporting and disclosures. The third factor focussed on market efficiency as an ultimate

solution to corporate conduct and performance.

The codes and principles derived from this experience appear to be influencing the developing

countries in terms of sensitisation to the need for good governance where capital markets are expanding

briskly. In the process, however, major business/commercial segments of the economies in the developing

world are not covered by the corporate governance regulatory net or have found the principles less

rewarding in practice.

The framework for the principles of corporate governance has emanated from such a "world-

view" and with the objective of creating efficient and transparent markets with widely held privateownership. Understandably, codes and principles in different countries have tended to believe that all

enterprises will be of one variety only despite the caution that "one size doesn’t fit all". Thus, public

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enterprises have been treated in the same manner as the private either with the assumption that what is

good for one is good for the other, or on the premise that eventually all enterprises should be free of

dominant ownership of the government. The role of Governments as market regulator has been widely

accepted and competition laws are emerging for protecting the people.

Importance of Corporate GovernanceThe need, significance or importance of corporate governance is listed below.

Changing Ownership Structure : In recent years, the ownership structure of companies has

changed a lot. Public financial institutions, mutual funds, etc. are the single largest shareholder in

most of the large companies. So, they have effective control on the management of the companies.

They force the management to use corporate governance. That is, they put pressure on the

management to become more efficient, transparent, accountable, etc. The also ask the

management to make consumer-friendly policies, to protect all social groups and to protect the

environment. So, the changing ownership structure has resulted in corporate governance.

Importance of Social Responsibi l ity : Today, social responsibility is given a lot of importance.The Board of Directors have to protect the rights of the customers, employees, shareholders,

suppliers, local communities, etc. This is possible only if they use corporate governance.

Growing Number of Scams : In recent years, many scams, frauds and corrupt practices have taken

place. Misuse and misappropriation of public money are happening everyday in India and

worldwide. It is happening in the stock market, banks, financial institutions, companies and

government offices. In order to avoid these scams and financial irregularities, many companies

have started corporate governance.

I ndi ff erence on the part of Shareholders: In general, shareholders are inactive in the

management of their companies. They only attend the Annual general meeting. Postal ballot is

still absent in India. Proxies are not allowed to speak in the meetings. Shareholders associationsare not strong. Therefore, directors misuse their power for their own benefits. So, there is a need

for corporate governance to protect all the stakeholders of the company.

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Globalisation : Today most big companies are selling their goods in the global market. So, they

have to attract foreign investor and foreign customers. They also have to follow foreign rules and

regulations. All this requires corporate governance. Without Corporate governance, it is

impossible to enter, survive and succeed the global market.

Takeovers and Mergers : Today, there are many takeovers and mergers in the business world.Corporate governance is required to protect the interest of all the parties during takeovers and

mergers.

SEBI : SEBI has made corporate governance compulsory for certain companies. This is done to protect the interest of the investors and other stakeholders.

Benefits of Good Corporate governanceThe concept of corporate governance has been attracting public attention for quite some time. It has

been finding wide acceptance for its relevance and importance to the industry and economy. It contributes

not only to the efficiency of a business enterprise, but also, to the growth and progress of a country's

economy. Progressively, firms have voluntarily put in place systems of good corporate governance for thefollowing reasons:

Several studies in India and abroad have indicated that markets and investors take notice of well

managed companies and respond positively to them. Such companies have a system of good

corporate governance in place, which allows sufficient freedom to the board and management to

take decisions towards the progress of their companies and to innovate, while remaining within

the framework of effective accountability.

In today's globalised world, corporations need to access global pools of capital as well as attract

and retain the best human capital from various parts of the world. Under such a scenario, unless a

corporation embraces and demonstrates ethical conduct, it will not be able to succeed.

The credibility offered by good corporate governance procedures also helps maintain the

confidence of investors – both foreign and domestic – to attract more long-term capital. This willultimately induce more stable sources of financing.

A corporation is a congregation of various stakeholders, like customers, employees, investors,

vendor partners, government and society. Its growth requires the cooperation of all the

stakeholders. Hence it imperative for a corporation to be fair and transparent to all its stakeholders

in all its transactions by adhering to the best corporate governance practices.

Good Corporate Governance standards add considerable value to the operational performance of a

company by:

1. Improving strategic thinking at the top through induction of independent directors who

bring in experience and new ideas;

2. Rationalizing the management and constant monitoring of risk that a firm faces globally;

3.

Limiting the liability of top management and directors by carefully articulating the

decision making process;

4.

Assuring the integrity of financial reports, etc.

It also has a long term reputational effects among key stakeholders, both internally and externally.

Also, the instances of financial crisis have brought the subject of corporate governance to the

surface. They have shifted the emphasis on compliance with substance, rather than form, and

brought to sharper focus the need for intellectual honesty and integrity. This is because financial

and non-financial disclosures made by any firm are only as good and honest as the people behind

them.

Good governance system, demonstrated by adoption of good corporate governance practices,

builds confidence amongst stakeholders as well as prospective stakeholders. Investors are willingto pay higher prices to the corporate demonstrating strict adherence to internally accepted norms

of corporate governance.

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Effective governance reduces perceived risks, consequently reduces cost of capital and enables

board of directors to take quick and better decisions which ultimately improves bottom line of the

corporate.

Adoption of good corporate governance practices provides long term sustenance and strengthens

stakeholders' relationship.

A good corporate citizen becomes an icon and enjoys a position of respects.

Potential stakeholders aspire to enter into relationships with enterprises whose governance

credentials are exemplary.

Adoption of good corporate governance practices provides stability and growth to the enterprise.

The concept of corporate/corporationA legal entity that is separate and distinct from its owners. Corporations enjoy most of the rights

and responsibilities that an individual possesses; that is, a corporation has the right to enter into contracts,

loan and borrow money, sue and be sued, hire employees, own assets and pay taxes.

The most important aspect of a corporation is limited liability. That is, shareholders have the right

to participate in the profits, through dividends and/or the appreciation of stock, but are not held personally

liable for the company's debts.A corporation is created (incorporated) by a group of shareholders who have ownership of the

corporation, represented by their holding of common stock. Shareholders elect a board of directors

(generally receiving one vote per share) who appoint and oversee management of the corporation.

Although a corporation does not necessarily have to be for profit, the vast majority of corporations are

setup with the goal of providing a return for its shareholders. When you purchase stock you are becoming

part owner in a corporation.

Character istics of a corporation

Unlimited life: - As a corporation is owned by stockholders and managed by employees, the sale

of stock, death of a stockholder, or inability of an employee to function does not impact the

continuous life of the corporation. Its charter may limit the corporation's life although thecorporation may continue if the charter is extended.

Limited liability: - The liability of stockholders is limited to the amount each has invested in the

corporation. Personal assets of stockholders are not available to creditors or lenders seeking

payment of amounts owed by the corporation. Creditors are limited to corporate assets for

satisfaction of their claims.

Separate legal entity: - The Corporation is considered a separate legal entity, conducting

business in its own name. Therefore, corporations may own property, enter into binding contracts,

borrow money, sue and be sued and pay taxes. Stockholders are agents for the corporation only if

they are also employees or designated as agents.

Relative ease of transferring ownership rights: -A person who buys stock in a corporation is

called a stockholder and receives a stock certificate indicating the number of shares of the

company she/he has purchased. Particularly in a public company, the stock can be easily

transferred in part or total at the discretion of the stockholder. The stockholder wishing to transfer

(sell) stock does not require the approval of the other stockholders to sell the stock. Similarly, a

person or an entity wishing to purchase stock in a corporation does not require the approval of the

corporation or its existing stockholders before purchasing the stock. Once a public corporation

sells its initial offering of stock, it is not part of any subsequent transfers except as a record keeper

of share ownership. Privately held companies may have some restrictions on the transfer of stock.

Ease of capital acquisition: - A corporation can obtain capital by selling stock or bonds. This

gives a corporation a larger pool of resources because it is not limited to the resources of a small

number of individuals. The limited liability and ease of transferring ownership rights makes iteasier for a corporation to acquire capital by selling stock, and the size of the corporation allows it

to issue bonds based on its name.

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Agency theory can be applied to the agency relationship deriving from the separation between

ownership and control.

Companies that are quoted on a stock market such as the London Stock Exchange are oftenextremely complex and require a substantial investment in equity to fund them, i.e. they often

have large numbers of shareholders.

Shareholders delegate control to professional managers (the board of directors) to run the

company on their behalf.

The Directors (agents) have a fiduciary responsibility to the shareholders (principal) of their

organisation (usually described through company law as 'operating in the best interests of the

shareholders').

Shareholders normally play a passive role in the day-to-day management of the company.

Directors own less than 1% of the shares of most of the UK's 100 largest quoted companies and

only four out of ten directors of listed companies own any shares in their business.

Separation of ownership and control leads to a potential conflict of interests between directors andshareholders.

The agents' objectives (such as a desire for high salary, large bonus and status for a director) will

differ from the principal's objectives (wealth maximization for shareholders).

Agency theory can help to explain the actions of the various interest groups in the corporate governance

debate

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Examination of theories behind corporate governance provides a foundation for understanding the

issue in greater depth and a link between an historical perspective and its application in modern

governance standards.

Historically, companies were owned and managed by the same people. For economies to grow it

was necessary to find a larger number of investors to provide finance to assist in corporate

expansion.

This led to the concept of limited liability and the development of stock markets to buy and sell shares.

Limited liability: limited risk and so less interest in the firm.

Stock market: wide and limited individual ownership and the ability to simply sell without the

need to take any interest in the firm.

Delegation of running the firm to the agent or managers.

Separation of goals between wealth maximization of shareholders and the personal objectives of

managers. This separation is a key assumption of agency theory.

Possible short-term perspective of managers rather than protecting long-term shareholder wealth.

Divorce between ownership and control linked with differing objectives creates agency problems.

Examples of principal-agent relationships

1. Shareholders and directors

The separation of ownership and control in a business leads to a potential conflict of interests between

directors and shareholders.

The conflict of interests between principal (shareholder) and agent (director) gives rise to the

'principal-agent problem' which is the key area of corporate governance focus.

The principals need to find ways of ensuring that their agents act in their (the principals') interests.

As a result of several high profile corporate collapses, caused by over-dominant or 'fat cat'

directors, there has been a very active debate about the power of boards of directors, and howstakeholders (not just shareholders) can seek to ensure that directors do not abuse their powers.

Various reports have been published, and legislation has been enacted, in the UK and the US,

which seek to improve the control that stakeholders can exercise over the board of directors of the

company.

2. Shareholders and auditors

The other principal-agent relationship dealt with by corporate governance guidelines is that of the

company with its auditors.

The audit is seen as a key component of corporate governance, providing an independent review

of the financial position of the organisation.

Auditors act as agents to principals (shareholders) when performing an audit and this relationship brings similar concerns with regard to trust and confidence as the director-shareholder

relationship.

Like directors, auditors will have their own interests and motives to consider.

Auditor independence from the board of directors is of great importance to shareholders and is

seen as a key factor in helping to deliver audit quality. However, an audit necessitates a close

working relationship with the board of directors of a company.

This close relationship has led (and continues to lead) shareholders to question the perceived and

actual independence of auditors so tougher controls and standards have been introduced to protect

them.

Who audits the auditors?

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The cost of agency relationship

Agency costs arise largely from principals monitoring activities of agents, and may be viewed in

monetary terms, resources consumed or time taken in monitoring. Costs are borne by the principal, but

may be indirectly incurred as the agent spends time and resources on certain activities. Examples of costs

include:

incentive schemes and remuneration packages for directors

costs of management providing annual report data such as committee activity and risk

management analysis, and cost of principal reviewing this data

cost of meetings with financial analysts and principal shareholders

the cost of accepting higher risks than shareholders would like in the way in which the company

operates

Cost of monitoring behaviour, such as by establishing management audit procedures.

Agency problem resolution measure

Meetings between the directors and key institutional investors.

Voting rights at the AGM – Annual grade meeting in support of, or against, resolutions.

Proposing resolutions for vote by shareholders at AGMs. Accepting takeovers.

Divestment of shares is the ultimate threat.

Need for corporate governance

If the market mechanism and shareholder activities are not enough to monitor the company then

some form of regulation is needed.

There are a number of codes of conduct and recommendations issued by governments and stock

exchanges. Although compliance is voluntary (in the sense it is not governed by law), the fear of

damage to reputation arising from governance weaknesses and the threat of delisting from stock

exchanges renders it difficult not to comply.

B. STEWARDSHIP THEORYStewardship theory is a theory that managers, left on their own, will indeed act as responsible

stewards of the assets they control. This theory is an alternative view of agency theory, in which

managers are assumed to act in their own self interests at the expense of shareholders. It specifies certain

mechanisms which reduces agency loss including tie executive compensation, levels of benefits and also

manager’s incentive schemes by rewarding them financially or offering shares that aligns financial

interest of executives to motivate them for better performance.

Unlike agency theory, stewardship theory assumes that managers are stewards whose behaviours are

aligned with the objectives of their principals. The theory argues and looks at a different form ofmotivation for managers drawn from organizational theory. Managers are viewed as loyal to the company

and interested in achieving high performance. The dominant motive, which directs managers to

accomplish their job, is their desire to perform excellently. Specifically, managers are conceived as being

motivated by a need to achieve, to gain intrinsic satisfaction through successfully performing inherently

challenging work, to exercise responsibility and authority, and thereby to gain recognition from peers and

bosses. Therefore, there are non-financial motivators for managers.

The theory also argues that an organization requires a structure that allows harmonization to be

achieved most efficiently between managers and owners. In the context of firm’s leadership, this situation

is attained more readily if the CEO is also the chairman of the board. This leadership structure will assist

them to attain superior performance to the extent that the CEO exercises complete authority over the

corporation and that their role is unambiguous and unchallenged. In this situation, power and authority are

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concentrated in a single person. Hence, the expectations about corporate leadership will be clearer and

more consistent both for subordinate managers and for other members of the corporate board. Thus, there

is no room for uncertainty as to who has authority or responsibility over a particular matter. The

organization will enjoy the benefits of unity of direction and of strong command and control.

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C. STAKEHOLDER THEORYStakeholder theory is a theory of organizational management and business ethics that addresses

morals and values in managing an organization. It was originally detailed by R. Edward Freeman in the

book Strategic Management: A Stakeholder Approach, and identifies and models the groups which are

stakeholders of a corporation, and both describe and recommends methods by which management can

give due regard to the interests of those groups. In short, it attempts to address the "Principle of Who or

What Really Counts."

In the traditional view of the firm, the shareholder view, the shareholders or stockholders are the

owners of the company, and the firm has a binding fiduciary duty to put their needs first, to increase value

for them. Stakeholder theory argues that there are other parties involved, including employees, customers,

suppliers, financiers, communities, governmental bodies, political groups, trade associations, and trade

unions. Even competitors are sometimes counted as stakeholders - their status being derived from their

capacity to affect the firm and its stakeholders.

The basis for stakeholder theory is that companies are so large and their impact on society so pervasive that they should discharge accountability to many more sectors of society than solely their

shareholders.

Stakeholder theory suggests that the purpose of a business is to create as much value as possiblefor stakeholders. In order to succeed and be sustainable over time, executives must keep the interests of

customers, suppliers, employees, communities and shareholders aligned and going in the same direction.

Innovation to keep these interests aligned is more important than the easy strategy of trading off the

interests of stakeholders against each other. Hence, by managing for stakeholders, executives will also

create as much value as possible for shareholders and other financiers.

Stakeholder theory may be the necessary outcome of agency theory given that there is a business

case in considering the needs of stakeholders through improved customer perception, employee

motivation, supplier stability, shareholder conscience investment.

Agency theory is a narrow form of stakeholder theory.

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D. SOCIOLOGICAL THEORYThe sociological theory focused mostly on board composition and wealth distribution.

Under this theory, board composition, financial reporting, disclosure and auditing are of utmost

importance to realise the socio-economic objectives of corporation.

Problem of interlocking directorships and the concentration of directorship in the hands of a

privileged class are viewed as major challenges to equity and social progress.

OBLIGATION – DUTIES OF CORPORATE GOVERNANCE

Obligation (Duty) to Society At Large

National Interest

Political non-alignment

Legal compliances Rule of law

Honest and ethical conduct

Corporate citizenship

Ethical behaviour

Social concerns

Corporate social responsibility

Environmental – friendliness

Healthy and safe working environment

Competition

Trusteeship Accountability

Effectiveness and efficiency

Timely responsiveness

Corporations should uphold the fair name of the country

Obligation to Investors

Towards shareholders

Measure promoting transparency and informed shareholder participation

Transparency

Financial reporting and records

Obligation to Employees

Fair employment practices

Equal opportunities employer

Encouraging whistle blowing

Humane treatment

Participation

Empowerment

Equity and inclusiveness Participative and collaborative environment

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Obligation to Customers

Quality of products and services

Products at affordable prices

Unwavering commitment to customer satisfaction

Managerial Obligation

Protecting company’s assets

Behaviour towards government agencies

Control

Society – oriented

Gifts and donations

Role and responsibilities of corporate board and directors

Direction and management must be distinguished

Managing and whole-time directors

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Module 03

Public Policies

The role of public policies in governing business, Government and public policy, classification of

public policy, areas of public policy, need for public policy in business, levels of public policy, elements

of public policy, the corporation and public policy, framing of public policy, business and politics levels

of involvement, business, government, society and media relationship government regulations in business,

justification of regulation, types of regulation, problems of regulation

Introduction

Public policy may be explained as a definite course or method of action selected from among

alternatives and in the light of given conditions to guide and determine present and future

decisions of governments or public authorities.

It is thus plan of action undertaken by government to achieve some broad public purpose.

Surprisingly, a generally accepted definition of public policy has been elusive. Some texts define public policy as simply "what government does." Others say that it is the stated principles which

guide the actions of government. Still others say that the discussion of a definition contributeslittle and moves quickly to illustrate a variety of case studies.

Simple Definition of Public PolicyPublic policy is a course of action adopted and pursued by a government.

Full Definition of Public PolicyPublic policy is a purposive and consistent course of action produced as a response to a perceived

problem of a constituency, formulated by a specific political process, and adopted, implemented, and

enforced by a public agency.

The course meaning and discussion will pull apart this definition, piece by piece, to elucidate notsimply the proposed definition. But the nature of public policy itself. We will plant the seeds for the

public policy cycle as a method of analysis. Along the way, some related terms will be used and also

defined.

"Public policy is a purposive and consistent course of action" suggests goals and the absence of

logical contradictions. This is still essentially the same as the short definition, above.

The phrase "produced as a response to a perceived problem of a constituency" implies that

government is responsive to its legitimate stakeholders, particularly citizens and voters. Do these

groups, the constituents, have real grievances or are they mistaken perceptions or have they badly

defined the purported problem? Does public policy respond to every complaint of every group?

Do some get attention and not others? Yet, agency is invoked: government must decide, largely

through political representatives, and citizens and groups need to be effective at pressing their

grievances. Problems abound here.

Then we need to identify a specific action: "formulated by a specific political process." The action

that might bring about a public policy must go somewhere -- and we need to identify which

organization has jurisdiction and might feasibly respond. Here, we must think in concrete and

specific language. There must be agency, which means that we are dealing with established

authority. Notice how the long definition raises doubts and introduced complexities.

Finally, the policy must be "adopted, implemented, and enforced by a public agency." That is,

some actions must be administered and implemented. Actions must ensure. Something must

happen. Try to connect the original issue to the resulting administration.

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Government and public policyThere is a close relationship between public policy and governments or public authorities. No

policy becomes public policy unless it is adopted, implemented and enforced by some governmental

institutions. Government gives public policy three distinctive characteristics: -

I. It lends legitimacy to policies. Government policies are generally regarded as legal obligations

which are easily observed by citizens.

II. Government policies involve universality as these extend to all sections in the society.

III.

Government can alone can exercise compulsion in society-government can legitimately imprison

violators of its policies.

Classification of public policy

Public policy can be organised along the following five lines: -

Regulatory - Regulatory policy is about achieving government's objectives through the use of

regulations, laws, and other instruments to deliver better economic and social outcomes and thus

enhance the life of citizens and business

Distributive - distributive policies provide for goods and services such as welfare and health tospecific segments of the population.

Redistributive - aim at rearranging one or more of the basic schedules of social and economic

reward. For instance, provision of scholarship, old age pensions, unemployment insurance etc.

Capitalisation – business and local government receive distributive largesse from the central

government which aim at increasing the productive capacity of society. They include: - cash

payments for farmers, tax subsidies, gas subsidies etc.

Ethical – public policies follow the court’s directives and set out what ought and ought not to be

done in an area marked off by deep moral convictions.

Areas of public policy

I .

Economic management

Economic problems are one of the important areas of public policy.

Now with the emergence of stabilisation measures adopted by governments to combatrecession and depression and the concept of welfare state, it is assumed that state

intervention is essential and even inevitable in economic activities.

I I . Labour management relations

Another area of public policy that came out of the depression days is the area of labour-

management relations.

Industrial revolution has effectively challenged the outdated thinking of the managementthat labour is like a vendible commodity that can be bought or sold at any time.

I I I .

The welfare state It is believed that every man has the right to a good job, decent food, clothing and shelter.

It is the responsibility of the government to guarantee these rights.

Policy designed to help people whose basic needs have not been met for one reason or the

other by the market system.

I V. Shaping of publi c poli cies aff ecting corporate sector

Stakeholder expectations, if unmet, trigger action to transform social concern into pressure

on business and government.

A gap between the expected and actual performance stimulates public issue.

Need to understand the reason for public issues and how they get transformed into public

policy in the macro environment.

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Need for public policy in businessPublic policies that affect corporations are shaped by four forces, which are shown in the figure.

Figure 4.1

To create a competi tive environment

o Public policies help the market to have perfect competition by way of controlling

monopolies through license or by creating a competitive market mechanism.

To have control on foreign i nvestment

o Government interferes in regulating foreign investments in certain industries which is very

critical for the country.

o Sometimes objective is to encourage local investment when the domestic economy is

doing well. Government may adopt protection policies for the following reasons: -

To protect the growing local industries To regulate demand and supply, where resources are scarce

To regulate the prices in the unhealthy competitive environment

To protect the natural environment

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Elements of public policy

A government action that goes into its making in terms of public policy and execution can be

understood in terms of several basic elements.

Inputs

o Inputs influence the development of public policy. Government may determine its course

of action on the basis of several factors such as economic, foreign policy, domestic

political pressure, natural calamities etc.

o All these inputs can help shape what the government chooses to do and how it chooses to

do it.

Goalso Public policy goals can be ideal oriented or narrow, and self – serving.

o Public policy goals may vary widely, but it is always important to inquire whether it

served the citizens of the country whose welfare it intends to serve.

o Goal should be – greatest good to the largest number of people.

Mechanism/instrument

o Instruments of public policy are those combinations of incentives and disincentives that

government uses to prompt citizens, including businesses, to act in ways that achieve

goals.

o For instance, in budget negotiations focus on alternative ways to raise revenue, graduating

tax rates for individuals and businesses, reduced deductions, excise duties, sales taxes on

selected items.

Results

o Public policy actions always have effects. Some are intended. Others are unintended.

o Since public policies affect millions of people corporations and other interests, it is almost

inevitable that such actions will please some and displease others.

o For instance, when the government of India provided for pre-natal and post-natal leave

with full salary for pregnant women, many companies in India did not employ women

employees.

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Public policy process

1. Problem I denti fi cation

Either public opinion or elite opinion expresses dissatisfaction with a status quo policy. The problem isdefined and articulated by individuals and institutions such as mass media, interest groups, and parties.

2. Agenda Setting

The definition of alternatives is crucial to the policy process and outcomes. Before a policy can be

formulated and adopted, the issue must compete for space on the agenda (list of items being actively

considered). An idea must make it through several levels, including the broad political system agenda, the

congressional and presidential agendas, and the bureaucratic agenda. Key actors in agenda setting include

think tanks, interest groups, media, and government officials.

3. Policy Making

From the problems that have been identified and have made it onto the various agendas, policies must be

formulated to address the problems. Those policy formulations then must be adopted (authorized) throughthe congressional process and refined through the bureaucratic process. Of course, a non-decision

(inaction, or defeating a proposal) is, itself, policy making.

4. Budgeting

Each year, Congress must decide through the appropriations process how much money to spend on each

policy. Generally, a policy must first be authorized (adopted) before money can be appropriated for it in

the annual budget.

5. Implementation

Executive agencies (the bureaucracy) carry out, or implement, policy. Implementation could include

adopting rules and regulations, providing services and products, public education campaigns, adjudicationof disputes, etc.

6. Evaluation

Numerous actors evaluate the impact of policies, to see if they are solving the problems identified and

accomplishing their goals. Evaluation looks at costs and benefits of policies as well as their indirect and

unintended effects. Congress uses its oversight function and the General Accounting Office for

evaluation, agencies evaluate their own performance, and outside evaluators include interest groups, think

tanks, academia, and media. Evaluation frequently triggers identification of problems and a new round of

agenda setting and policy making.

Framing of public policy

Consti tuti onal governments

o The will of the people and their desires get reflected in public policies.

o Petitions through elected representatives, public debate, media promotion, use of tobacco

causing cancer, etc are some of the ways of framing public policy.

Non – democratic governmentso Special interest lobbying of the leadership elite, public demonstration and civil

disobedience play decisive roles in shaping public policies.

o Public is uninformed about the policy and gets frustrated.

o Media is controlled very much under these governments.

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Business and politics – levels of involvementThere are three levels of business involvement, they are as follows: -

1. Level 1: f inancial i nvolvement

Formation of political action committee: - in some countries like USA, companies have

been permitted to spend company funds to organise and administer a political action

committee. PAC may solicit contributions from stock – holders and employees and then

channels the funds to those seeking political office.

Trade association support : - many large corporations place full – time liaison (link)

officers in national capitals to keep abreast of developments in the government that may

affect the company, or to influence taking of favourable policy decisions through various

public relation activities.

2. Level 2: organisational involvement

Lobbying : - lobbying involves direct contact with a government official to influence the

thinking of that person on an issue or public policy. It is usually done through fact to face

contact, sometime in lengthy discussions.

Employ grass root involvement : - grass root programmes are organised efforts to getconstituents to influence government officials to vote or act in a favourable way.

3. Level 3: strategic publ ic poli cy involvement

Through executive participation where the representatives participate in decision making

by acting as the part of the executive.

Business – Government – Society – Media relationship

The role of government as an agent representing citizens of a country.

Businessmen understand and accept the fact that governments can create or destroy the basic

conditions necessary for business to compete and citizens to prosper.

Governments generally accept the view that their key role is to create appropriate public policy

that promotes economic growth.

Poor economic development will accelerate a nation’s social problems, including high

unemployment, pushing people below poverty line and bring in pressures to raise taxes. An

expanding economy means job opportunities for trained workers but also higher labour costs for

businesses. On balance, political leaders favour economic growth because it creates increased

national wealth.

Media raises issues as a player, in keeping/placing issues in the agenda and in contributing to their

resolution.

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Gover

BGS Module 1-7

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Transcript of BGS Module 1-7