Globalization, advanced technologies and the economic environment of today’s world have increased the competitiveness and complexity of businesses. Another challenge for the corporate systems has been the risk of scandals. It has not only made shareholders dubious, but it has also put the management under excessive scrutiny. This has caused most companies to implement and pay close attention to their ethics and compliance rules. Since ethics and compliance are comparatively new terms in the legal and corporate world, many do not really know what these terms mean and sometimes tend to misinterpret the terms. While both these terms have similar meanings and are quite interdependent in reality, it is important to understand that they are not interchangeable, neither by definition nor in action. For this, one must first understand what these two terms mean separately and how they can be distinguished from one another.
WHAT DO YOU MEAN BY “ETHICS”?:
The term “Ethics” is derived from the Greek word “ethos” which means “character” or “way of life”. It is also considered to be a branch of philosophy, that studies the conduct of an individual in society. It found a significant place in the ancient age, prominently found in the works of Socrates, who likened ‘ethical philosophy’ to ‘the art of living and caring for the soul’.
In the modern world, Ethics is considered as the oversight of the spirit of law with the intent to do what is right. It is quite difficult to ascertain one particular definition for the term, as everyone has a different approach towards understanding the term. To highlight a few, according to Carol Tate, Director, Ethics and Legal Compliance for the Intel Corporation, “Ethics goes beyond what the law requires. It involves doing the right thing and following both the spirit and not just the letter of the law”.[1]
In general, “ethics” is considered the distinction individuals make between right and wrong and how it affects their behaviour and interactions in the society.
WHAT DO YOU MEAN BY “COMPLIANCE”?:
To put it simply, “Compliance” means adhering to rules and regulations established by the law of the land, the respective regulatory authorities and internal directives laid down by the company. Compliance in companies first came to the limelight due to a series of scandals that took place in the United States of America and in the European continent. Compliance encompasses many matters involving an organisation, such as, adapting security procedures and controls, adhering to protection- at -workplace laws, due diligence, analysing and avoiding financial scandals, keeping a check on fraudulent activities and corruption within the company, whistle blower and vigil mechanisms following environmental protection rules, labour laws and code of conduct laid down by the countries in which the companies are established in.
According to Cindy Morrison, Director of Compliance for Post Holdings, Inc., “Compliance is the act of conforming to company policies and procedures as required by laws and regulations.”[2]
WHO IS RESPONSIBLE FOR ETHICS AND COMPLIANCE IN ORGANISATIONS? :
While some companies have a whole department dedicated to ethics and compliance, some companies have only compliance departments. Many a times compliance officers are tasked with the job of keeping the compliance regulations of the organisation in check. Most of the time, the leadership and the top management are responsible for the creation and implementation of ethics and compliance policies of a company.
ETHICS AND COMPLIANCE ACROSS THE GLOBE:
While ‘ethics and compliance in organisations’ has gained momentum around the world today, its beginnings can be traced back to 1980’s USA, where the creation of an initiative was begun by a group of 18 of the top defence companies in the country, with the aim to formulate written codes of ethics for its employees to follow.
Once the new millennium began many parts of the world began seriously considering and formulating their own ethics and compliance procedures in line with the changing economic and legal dynamics of the world. The Russian Federal Law on Personal Data (2006), International Standards Organization’s Compliance Management System Standard (2014), the Foreign Corrupt Practices Act (FCPA), the German Corporate Governance Code (DCGK) and the EU Directives are a few recent examples of ethics and compliance regulations that have come into being.
ETHICS AND COMPLIANCE IN INDIA:
Indian Laws have always been very stringent with regards to ethics; be it in private laws or public laws. While most companies and organisations are given a free reign to decide upon the ethical policies to be followed in their establishments, the laws and responsible statutory bodies usually keep a tab on these policies so as ensure there are no prejudices or erroneous inclusions.
The Indian Government has come up with various frameworks that companies that are established in India; irrespective of them being foreign or national entities, must comply with.
These statutory compliance regulations ensure a safer, better and fair working environment for the employees; whilst keeping effective check on unauthorized or illegal activities or non-compliance of regulations by the corporates.
Out of these statutory provisions the most significance is alluded to the labour and employment laws, industrial dispute laws, fiscal policies such as FEMA and banking regulations, tax laws, maternity benefits and environment protection laws. Compliances regulations can also be categorised as labour compliance, corporate compliance, financial compliance, etc.
Financial and corporate compliance include a wide range of statutes but the highest priority is given to the Companies Act 2013, the Income Tax Act 1961, the Reserve Bank of India and it guidelines, the Banking Regulation Act 1949, the Foreign Exchange Management Act 1999, the Securities and Exchange Board of India 1992 and its guidelines, the Competition Act 2002 and the Goods and Services Tax Act 2017. Corporates are also required to comply with labour law regulations and these mostly encompass the Industrial Disputes Act 1947, the Employees State Insurance Act 1948, the Employees’ Provident Funds and Miscellaneous Provisions Act 1952, the Payment of Bonus Act 1965, the Factories Act 1948, the Contract Labour (Regulation and Abolition) Act 1970, the Child Labour (Prohibition and Regulation) Act 1986, the Maternity Benefit Act 1961, the Payment of Gratuity Act 1972 and the Sexual Harassment of Women at Workplace (Prevention, Prohibition and Redressal) Act 2013.
Compliance is also at times coupled with risk management by some corporates. It is usually at the behest of the board of directors that an ethics and compliance team is formed by in-house counsels or compliance officers that are appointed externally. The sector, size and scale and nature of business activities usually influence compliance management in the organisations. A well-made corporate governance policy ensures that the organisation adopts good ethical practices and values and comply with the legal and regulatory mandates of the country.
REGULATORY AND ENFORCEMENT BODIES :
In India, the legal framework provides for business-specific regulatory and enforcement bodies that are responsible for corporate compliance in their respective sectors. To name a few, the Registrar of Companies also known as the ROC is a regulatory authority under the Ministry of Corporate Affairs. The ROC is responsible for the administration of the Companies Act 2013 and it is mandatory for corporates to file various documents, returns and forms with respect to their regular compliance activities. The Securities and Exchange Board of India is another example. Also referred to as SEBI, the board was established to promote and regulate the Indian securities market. With the purpose of protecting the interests of the investors SEBI has formulated various provisions that listed entities are required to comply with.
There are no specific guidelines laid down by Indian Laws with respect to ethics and compliance practices, but they are rather included in laws and statutes and the corporates are deemed to abide by those compliance regulations. For example, the Information Technology (Reasonable Security Practices and Procedures and Sensitive Personal Data or Information) Rules 2011 lays down the rule that companies must have reasonable security practices and procedures and that companies are deemed in compliance if they have a documented security programme with managerial, technical, organisational and physical controls.
For a general idea about how compliance management works, organisations usually follow two methods ; i.e. reporting and delegating roles and responsibilities. Reporting basically includes reports to the board from the management that give a detailed and balanced assessment of internal management and control and effectiveness of the system created in the organisation. The second method is based on the accountability of every employ in performing and abiding by compliance regulations in areas related to them.
PROMINENT CASES THAT BROUGHT ETHICS AND COMPLIANCE ISSUES TO THE LIMELIGHT:
While there are many significant cases around the world that are related to unethical practices and non-compliance with laws, the following are few cases that showcased the impact of ethics and compliance in the corporate world:
1. The Enron Case:
Until the top management of American company Enron was convicted of extensive balance sheet falsifications, the company was regarded as an entrepreneurial genius by the American media and investors. The scandal not only drove the company into insolvency, but it also prompted the passage of the Sarbanes-Oxley Act (SOX) and new corporate reporting regulations.
2. Wirecard Case:
A similar scandal as the Enron case occurred in Germany , when financial services provider Wirecard was found guilty of falsifying its financial statements. Since then, ex-CEO Jan Marsalek has been on the run, and CEO Markus Braun has been detained for more than a year and a half.
3. Tyco Fraud and Larceny Case:
The CEO of Tyco, a massive security and electronics company, Dennis Kozlowski, was caught red-handed with his hand in the company’s coffers. The board of directors discovered in 2002 that Kozlowski and the company’s CFO, Mark Schwartz, had received unauthorised bonuses and loans totalling $600 million. The men were charged with larceny and securities fraud, among other things. According to investigations, Kozlowski used corporate funds to pay for lavish parties, a Manhattan apartment, a $6,000 shower curtain, and expensive jewellery. His first trial in 2004 ended in a mistrial, but he was sentenced to 8 to 25 years in prison in 2005. He was released in 2014, after serving eight years in prison.
4. Sahara Case:
In 2011, SEBI ordered the Sahara group to pay a particular amount to its investors for failing to refund over 200 billion rupees to its large number of small investors, collected via two unlisted companies under the Sahara Group. SEBI said that this issue was not in compliance with applicable requirements of the public offerings of securities.
5. Satyam Scam Case:
Until 2010, the Satyam Computer Services scandal was India’s largest corporate fraud. The founder and directors of India-based outsourcing firm Satyam Computer Services falsified the company’s accounts, inflated the share prices, and stole large sums from it.
CRITICAL ANALYSIS AND OBSTACLES FACED BY THE ETHICS AND COMPLIANCE PRACTICES IN INDIAN CORPORATES:
Compliance in India has predominantly always been concerned with adhering to laws and regulations. Several MNCs with operations in India have established compliance functions focused on anti-corruption and anti-bribery compliance. But many small-scale ventures lack a separate compliance function, and traditional roles and responsibilities are typically distributed across other departments such as finance, human resources and legal.
Companies are expected to implement higher standards of ethics and compliance as a result of increased regulations and enforcement, globalisation and expansion of operations. As a result, businesses are in dire need for a dedicated and independent ethics and compliance department.
The most significant barrier for businesses in India remains bureaucratic processes, complex regulatory frameworks, and a lack of ease of doing business. These factors raise the cost of compliance and prevent companies committed to ethical business practises from creating a level playing field.
CONCLUSION
Good ethics and compliance practices help in building a stronger internal network in the organization and make the progression and expansion of business much more easier. It also helps corporates increase their goodwill and create an inviolable support system within various corporate dynamics, be it intrinsic or extrinsic.
The changing corporate environment and the Government’s agenda to increase transparency and reduce corruption is evident in recent initiatives and these steps encourage companies to proactively adopt higher corporate governance standards, ethical business practices and adhere to applicable compliance regulations.
[1] Bruce Weinstein, What’s the Difference Between Compliance and Ethics, Forbes.com
(Feb 20, 2023 12:30 PM) https://www.forbes.com/sites/bruceweinstein/2019/05/09/whats-the-difference-between-compliance-and-ethics/
[2] Bruce Weinstein, What’s the Difference Between Compliance and Ethics, Forbes.com
(Feb 20, 2023 12:30 PM) https://www.forbes.com/sites/bruceweinstein/2019/05/09/whats-the-difference-between-compliance-and-ethics/
Author: Saranya Prasad
Juris Centre 