Corporate Governance and Business Ethics

Corporate governance is about how a company is run, and who it’s run for. This matters to civil servants too. Governments regulate companies, own shares in public sector companies, and are expected to hold themselves to similar standards of honest, accountable conduct.

MCQ Questions

Ethics, Integrity and Aptitude

Shareholder Primacy vs. Stakeholder Theory

Shareholder Primacy

The traditional view

Core claimA company’s main duty is maximising shareholder profit

Who countsOwners of company shares

Governance focusReturns, disclosure, avoiding self-dealing

Stakeholder Theory

R. Edward Freeman

Core claimBalance the interests of everyone the company affects

Who countsEmployees, customers, suppliers, the wider community

Governance focusCSR (India: 2% of net profit, Companies Act 2013)

📑 Contents

1Must Know
2Good to Know
3Test Yourself
4Great to Know

🏢 Governance Fundamentals

Core Concepts

Corporate Governance The system of rules, practices, and processes by which a company is directed and controlled. It covers how decisions get made, who is accountable to whom, and how the interests of different groups connected to the company are balanced.
Stakeholder Anyone affected by a company’s decisions — not just shareholders, but also employees, customers, suppliers, and the wider community. Good corporate governance is expected to consider all of them.
CSR The idea that companies have obligations to society beyond making a profit: protecting the environment, treating workers fairly, giving back to the community. In India, CSR spending is legally required for large companies under the Companies Act, 2013. The Indian Institute of Corporate Affairs (IICA), under the Ministry of Corporate Affairs, trains officers and runs outreach on exactly these governance topics.
Conflict of Interest In a company, this commonly appears as a director or manager with a personal financial stake in a decision. That decision is one they’re supposed to make on the company’s behalf.

🏢 CSR Rules and Ethics Debates

Shareholder vs Stakeholder

The shareholder primacy view holds that a company’s main duty is to maximise profit for its shareholders. The stakeholder theory view, developed by scholar R. Edward Freeman, holds instead that a company should balance the interests of all its stakeholders. This is one of the most tested debates in business ethics.
A whistleblower is an employee who reports wrongdoing, fraud, or illegal activity within their own organisation. Corporate governance codes increasingly require companies to have a formal whistleblower policy that protects such employees from retaliation.
Some of the world’s biggest corporate scandals are frequently cited as case studies in what happens when governance and independent oversight fail. Examples include the Enron accounting fraud in the US (2001). India’s own Satyam scandal (2009) is another, where the company’s chairman admitted to inflating profits for years.

What Actually Counts as CSR

Minimum Spend India’s Companies Act, 2013 requires companies of a certain size to spend at least 2% of their average net profit on CSR activities. It’s one of the first legal mandates of its kind anywhere in the world.
What’s Excluded CSR rules specifically exclude expenditures that benefit the company directly or its own employees. Ordinary business spending or employee-welfare spending doesn’t count as CSR, keeping the category distinct from routine HR or operations budgets.

Greenwashing: When Sustainability Claims Are Fake

Definition Greenwashing means conveying a false impression that a company’s products are eco-friendly and environmentally sound, when they aren’t.
Common Tactics Companies greenwash through vague labels like “green” or “eco-friendly” with no real standard behind them, unsubstantiated claims, and imagery suggesting environmental virtue that isn’t backed by data.
Why It Matters Greenwashing misleads consumers and investors, undermines genuine sustainability efforts, and lets harmful practices continue under a false green label.

📝 Previous Year Questions

UPSC CSP 2022 — What “Greenwashing” Actually Means

UPSC 2022 Greenwashing is best described as conveying a false impression that a company’s products are eco-friendly and environmentally sound. It is not about financial-statement omissions or infrastructure ecological costs. See UPSC CSP 2022 GS Paper I, Q80. View this question.

Test Yourself

🌟 Oversight in Practice

Who Checks the Checkers

India’s corporate governance rules require listed companies to have a minimum number of independent directors on their board — directors with no material financial or personal relationship with the company, meant as a check on management decisions.
The Securities and Exchange Board of India (SEBI) regulates listed companies’ governance practices, including disclosure requirements, related-party transaction rules, and insider trading restrictions.
Corporate governance failures are often traced not to a single dishonest act, but to a chain of smaller failures. Weak board oversight, an auditor reluctant to raise concerns, or a culture where questioning leadership was discouraged: any of these can be the real cause. They echo the groupthink and ethical fading ideas already covered on this site, at organisational rather than individual scale.