Download - 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 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