Business Ethics and Corporate Governance | Unit 6 | Business Ethics and Corporate Governance Codes and Standards||

Unit 6

Concept of a Code of Ethics

A code of ethics is a formal document or set of guidelines that outlines the moral principles, values, and standards of behavior expected from individuals, professionals, or organizations within a specific context, such as business, professions, or industries. It serves as a framework to guide decision-making, promote integrity, and ensure actions align with ethical norms. Unlike laws, which are enforceable by legal systems, a code of ethics is often voluntary but can be enforced internally through organizational policies. The concept emphasizes accountability, transparency, and responsibility, helping to prevent misconduct while fostering a culture of trust and fairness.

Importance of a Code of Ethics

The importance of a code of ethics lies in its role as a foundational tool for building sustainable, trustworthy, and responsible entities. It provides several key benefits:

• Guides Ethical Decision-Making: In ambiguous situations, it offers clear directives, reducing the risk of unethical choices. For example, it helps employees navigate conflicts of interest or pressure to cut corners for profit.
• Builds Trust and Reputation: By demonstrating commitment to integrity, it enhances credibility with stakeholders. A strong ethical code can attract customers, investors, and talent, while protecting against reputational damage from scandals.
• Promotes Compliance and Risk Management: It aligns behavior with legal standards, minimizing violations, fines, or lawsuits. It also fosters a proactive approach to risks like fraud or environmental harm.
• Fosters a Positive Organizational Culture: It cultivates values like fairness and respect, leading to higher employee morale, retention, and productivity. Studies show companies with robust ethics codes experience lower turnover and better performance.
• Contributes to Societal Good: On a broader scale, it encourages corporate social responsibility (CSR), addressing issues like inequality or environmental degradation, aligning business with societal expectations.
• Enhances Long-Term Sustainability: Ethical practices lead to sustainable growth, as short-term gains from unethical behavior often result in long-term losses (e.g., loss of market share).

Contents of a Code of Ethics

A typical code of ethics is structured to be comprehensive yet accessible, often including an introduction, core values, specific guidelines, and enforcement mechanisms. Common contents include:

• Preamble or Introduction: States the purpose, scope, and commitment to ethical principles, often referencing the organization's mission or broader societal goals.
• Core Values and Principles: Outlines foundational beliefs like integrity, honesty, respect, accountability, and sustainability. These serve as the ethical compass.
• Standards of Conduct: Detailed rules for behavior in key areas, such as conflicts of interest, confidentiality, anti-discrimination, and fair competition. This may include prohibitions on bribery, harassment, or insider trading.
• Stakeholder Responsibilities: Guidelines on interactions with employees (e.g., fair wages), customers (e.g., truthful advertising), suppliers (e.g., ethical sourcing), and the community (e.g., CSR initiatives).
• Compliance and Reporting: Procedures for reporting violations, whistleblower protections, and consequences for breaches, including training requirements.
• Implementation and Review: Details on how the code is enforced, monitored, and updated, often with examples or case studies for clarity.

FNCCI's Business Code of Conduct, 2061

The Federation of Nepalese Chambers of Commerce and Industry (FNCCI) introduced its Business Code of Conduct in 2061 BS (2005 AD). This code serves as a voluntary ethical framework for FNCCI members, which include a wide range of businesses across Nepal’s private sector. It was developed to promote responsible business practices in a country navigating economic liberalization, political instability, and challenges like corruption and market inefficiencies. The code reflects Nepal’s socio-economic context and aligns with national development goals while drawing inspiration from global ethical standards.

Key Features and Provisions

The FNCCI’s Business Code of Conduct is structured around 18 specific points, designed to guide businesses in ethical decision-making and foster trust among stakeholders. Key elements include:

• Commitment to National Interest: Members pledge not to engage in activities against the state or public welfare. This is particularly relevant in Nepal’s post-conflict environment (after the Maoist insurgency ended in 2006), where businesses were expected to contribute to national unity and stability.
• Fair Pricing and Quality: Businesses must provide quality goods and services at reasonable prices, avoiding practices like adulteration or hoarding. For example, during festivals like Dashain, when demand for consumer goods spikes, this provision discourages artificial price hikes or selling substandard products (e.g., contaminated food items).
• Opposition to Monopolies and Syndicates: The code prohibits monopolistic practices and cartels, which are common in Nepal’s transport and supply chain sectors. For instance, during the 2015 India-Nepal border blockade, syndicates exacerbated fuel shortages by hoarding; adherence to the code could mitigate such practices.
• Anti-Bribery Measures: Gifts or donations exceeding NPR 5,000 are prohibited to prevent bribery, a significant issue in Nepal’s bureaucratic and political systems. This cap addresses the culture of “gift-giving” often used to secure business favors.
• Environmental Responsibility: Businesses are urged to adopt eco-friendly practices, crucial in Nepal due to its vulnerability to climate change (e.g., glacial melting affecting agriculture and tourism in the Himalayas).
• Tax Compliance and Transparency: Members must pay taxes on time and maintain transparent financial records, addressing widespread tax evasion in Nepal’s informal economy.
• Labor and Consumer Rights: The code emphasizes fair treatment of employees and respect for consumer rights, such as providing accurate product information, which is critical in markets where mislabeling (e.g., in pharmaceuticals) is a concern.

Importance in Nepal’s Context

The FNCCI code is significant for several reasons:

• Economic Context: In 2004, Nepal was transitioning to a market-oriented economy after joining the World Trade Organization (WTO). The code helped align businesses with international trade norms while addressing local issues like corruption (Nepal ranked 133rd on the Corruption Perceptions Index in 2004).
• Market Stability: By discouraging syndicates and unfair pricing, it protects consumers in a country prone to supply chain disruptions due to its landlocked geography and reliance on imports.
• Reputation Building: It enhances the credibility of Nepalese businesses, attracting foreign investment and supporting sectors like tourism and hydropower, which are vital to Nepal’s GDP (tourism alone contributed ~7% to GDP in the mid-2000s).

Example

During the 2015 earthquake, adherence to the FNCCI code could guide businesses to avoid price gouging on essentials like food and shelter materials, ensuring ethical behavior in a crisis. For instance, a construction company following the code would prioritize quality materials for rebuilding over cutting corners for profit, aligning with public welfare.

NBI's Business Code of Conduct Concepts, 2070

The National Business Initiative (NBI), a coalition of Nepalese business leaders, launched its Business Code of Conduct in 2070 BS (2013 AD). This code was developed to foster a prosperous, inclusive, and sustainable Nepal by promoting ethical business practices in a post-conflict, democratic era. It builds on the FNCCI’s efforts but is more comprehensive, addressing emerging challenges like environmental sustainability, labor rights, and Nepal’s integration into global markets. The NBI code is voluntary and targets businesses committed to ethical leadership and corporate social responsibility (CSR).

Key Features and Provisions

The NBI code is structured around a preamble envisioning a prosperous Nepal, followed by six overarching principles and specific guidelines for implementation. Key components include:

• Consumer Sovereignty: Businesses must prioritize consumer rights, such as providing accurate product information and ensuring safety. For example, in Nepal’s food markets, where adulteration (e.g., mixing harmful substances in dairy) is a concern, this principle ensures transparency and quality.
• Competitive Market Practices: The code advocates for fair competition and compliance with WTO regulations, discouraging cartels and monopolies. This is critical in sectors like cement or telecommunications, where dominant players can distort markets.
• Taxation and Financial Transparency: Businesses are required to maintain transparent accounting and pay taxes promptly, addressing Nepal’s high tax evasion rates (informal economy accounts for ~30% of GDP).
• Labor Management: The code promotes fair recruitment based on qualifications and tripartite dialogues (involving employers, employees, and government) to resolve disputes. This is vital in labor-intensive sectors like garment manufacturing, where strikes are common due to poor working conditions.
• Environmental Protection: Businesses must adopt sustainable practices, such as reducing emissions or managing waste, especially in industries like hydropower or tourism, which impact Nepal’s fragile ecosystems (e.g., Annapurna trekking routes).
• Corruption Control: The code explicitly prohibits donations to political parties for business favors, addressing Nepal’s history of cronyism. It also encourages anti-corruption measures, aligning with global standards like the UN Global Compact.
• Opposition to Destructive Practices: The code condemns bandhs (strikes) and chakkajams (road blockades), which disrupt Nepal’s economy. For instance, frequent bandhs in the 2010s caused significant losses (estimated at NPR 2 billion per day).

Importance in Nepal’s Context

The NBI code is tailored to Nepal’s unique challenges and opportunities:

• Post-Conflict Recovery: Introduced after the 2006 peace agreement, it supports economic stability by encouraging ethical practices during Nepal’s democratic transition.
• Global Integration: As Nepal deepens ties with international bodies (e.g., WTO, SAARC), the code aligns businesses with global standards, facilitating foreign direct investment (FDI), which was ~$200 million in 2013.
• Social and Environmental Focus: By prioritizing labor rights and sustainability, it addresses Nepal’s high poverty rates (~25% in 2013) and environmental risks (e.g., deforestation affecting 1.7% of forest cover annually).
• Anti-Corruption Efforts: With Nepal ranking 124th on the Corruption Perceptions Index in 2013, the code’s anti-corruption stance is crucial for building investor confidence and supporting initiatives like the Investment Board Nepal.

Example

In Nepal’s tea industry, the NBI code’s emphasis on fair labor practices could ensure workers in Ilam’s tea estates receive fair wages and safe conditions, reducing exploitation of marginalized groups like women or migrant laborers. Similarly, a hydropower company adhering to the code would prioritize environmental impact assessments, avoiding damage to rivers and local communities, as seen in controversies around projects like Upper Tamakoshi.

Key Corporate Governance Provisions in Prevailing Nepalese

Company Act 2063(2006)

The Companies Act, 2063 (2006), with amendments up to 2074 (2017), establishes a legal framework for corporate governance in Nepal. It promotes transparency, accountability, and ethical practices in Nepalese companies. Key provisions include:

1. Board of Directors (BOD) Structure and Responsibilities

• Composition: Public companies must have a BOD with at least 3 and no more than 11 directors.
• Duties: Directors set policies, approve major decisions, and ensure legal compliance (Section 76).
• Independent Oversight: Required in sectors like banks/financial institutions; especially for non-executive roles.
• Non-Interference: Directors oversee strategy but avoid day-to-day operations.
• Conflict of Interest: Must disclose personal/familial financial interests; prohibited from transactions causing conflicts.

2. Director Qualification and Disqualification

• Eligibility: Outlined in Section 83; bars bankrupt, convicted, or mentally incapacitated individuals.
• Conflict Disclosure: Mandatory to protect impartiality and shareholder interests.
• Professional Standards: Directors need relevant education and experience, especially in banking.

3. Audit Committee

• Oversight Role: Public companies must form a committee to monitor financial reporting and auditing (Section 164).
• Composition: Chaired by a non-executive director; includes members with financial expertise.
• Internal Controls: Establish robust systems and conduct regular audits for regulatory compliance.
• Reporting: Ensure accurate, timely submission of financial statements to authorities.

4. Financial Disclosure and Transparency

• Reporting: Prepare audited annual financial statements; submit to Office of the Company Registrar (OCR).
• Shareholder Access: Provide accurate reports on profits/losses, director remuneration, and performance.

5. Annual General Meeting (AGM)

• Requirement: Convene within 1 year of incorporation, then annually within 6 months of fiscal year-end (Section 76).
• Decisions: Covers financial approvals, dividends, and director appointments.

6. Shareholder Rights and Protection

• Rights: Vote, receive dividends, access information, and sue for mismanagement (Section 64).
• Minority Protections: Ability to challenge unfair decisions.

7. Corporate Social Responsibility (CSR)

• Encouragement: Not mandatory for all under the Act but promoted; regulated in sectors like banking via NRB directives.

Nepal Rastra Bank’s (NRB) Unified Directives

NRB's Unified Directives apply to banks and financial institutions (BFIs), focusing on stability, compliance, and anti-fraud measures. They align with global standards like Basel III and support economic growth. Key provisions:

1. Counter Cyclical Capital Buffer (CCyB)

• Requires banks to build extra capital during high credit growth for resilience in downturns.
• Adjusts based on economic cycles; reinstated to support GDP growth and reduce volatility.

2. Anti-Money Laundering (AML) / Combating Financing of Terrorism (CFT)

• Empowers officials to remove risks; amended for stronger enforcement, even in remote areas.
• Includes penalties for non-compliance; focuses on preventing illicit flows.

3. Know Your Customer (KYC) & Permanent Account Number (PAN)

• Reduced PAN threshold for loans to NPR 5 million to enhance financial integrity.
• Strengthens tracking of high-value transactions; submission changes for borrowers.

4. Interest Rate Corridor

• Lowers deposit rate bound to 4.5% for stable rates and reduced volatility.
• Supports lending, economic activity, and financial system balance.

5. Digital Payment & Cybersecurity Standards

• Introduces stricter measures: Mandatory VPN for data center access; disaster recovery sites required.
• Raises mobile banking transaction limits to 0.5% of GDP for recovery encouragement.
• Promotes digital tools (e.g., single accounts for transactions); ensures safeguards against cyber threats.

6. Institutional Account Relaxations

• Raises ownership threshold for shareholder ID from 10% to 15%.
• Simplifies documentation for broad-ownership institutions; eases account opening while maintaining oversight for major stakeholders.
• Aims at financial inclusion without compromising transparency.

Summary Table for NRB's Directives

Domain	Key Provisions
Capital Adequacy	Counter cyclical buffer (Basel III) reinstated; penalties for officials.
Cybersecurity	Mandatory standards; prevent misuse of multiple cards/virtual assets.
Payment System	Measures to secure mobile/internet banking; direct drills for recovery.
AML/CFT	Stronger provisions; empower officials to remove money laundering risks.
Interest Rate	Corridor adjustments for stability; lower rates to stimulate credit.

International standards related to business ethics and corporate governance:

1. United Nation’s Global Compact (UNGC)

Concept: Launched in 2000, the UNGC is a voluntary initiative encouraging businesses to adopt 10 principles in four areas: human rights, labor, environment, and anti-corruption. It promotes sustainable and socially responsible practices aligned with the UN Sustainable Development Goals (SDGs).

Key Principles:

• Human Rights: Support and respect human rights; avoid complicity in abuses.
• Labor: Uphold freedom of association, eliminate forced/child labor, and non-discrimination.
• Environment: Promote eco-friendly practices and technologies.
• Anti-Corruption: Work against corruption, including bribery and extortion.

Importance: Encourages businesses to align with global ethical standards, enhancing reputation and stakeholder trust. Over 15,000 companies globally participate.

Relevance to Nepal: Supports Nepal’s SDG commitments (e.g., poverty reduction, clean energy). Helps address corruption (Nepal’s CPI rank ~110 in 2024) and labor issues in sectors like garments.
Example: A Nepalese hydropower firm adopting UNGC principles ensures fair labor practices and eco-friendly operations, aligning with Himalayan conservation goals.

2. SA 8000 (Social Accountability 8000)

Concept: Developed by Social Accountability International in 1997, SA 8000 is a certifiable standard for workplace conditions based on human rights and ILO conventions. It focuses on ethical labor practices.

Key Elements:

• No child/forced labor.
• Safe working conditions, fair wages, and reasonable hours.
• Freedom of association and non-discrimination.
• Management systems for compliance and audits.

Importance: Ensures ethical treatment of workers, critical for labor-intensive industries. Certification boosts credibility in global supply chains.
Relevance to Nepal: Addresses exploitation in industries like tea and carpets, where child labor and poor conditions persist. Supports export markets (e.g., carpets to Europe).
Example: A carpet factory in Bhaktapur adopts SA 8000, eliminating child labor and improving wages, gaining trust from international buyers.

3. ILO Standards (International Labour Organization)

Concept: Established by the ILO, a UN agency, these are global labor standards set through conventions and recommendations. Key conventions include C87 (freedom of association), C98 (collective bargaining), C29 (forced labor), and C138 (child labor).

Key Standards:

• Freedom to form unions and bargain collectively.
• Ban on forced/child labor and discrimination.
• Safe workplaces and fair wages.

Importance: Protects workers’ rights, promotes decent work, and ensures fair globalization. Binding for ratifying countries like Nepal.
Relevance to Nepal: Nepal has ratified 11 ILO conventions, including core ones. Critical for garment and construction sectors, where labor disputes and unsafe conditions are common.
Example: A garment factory in Kathmandu follows ILO standards by allowing unions and ensuring safety, reducing strikes and boosting productivity.

4. OECD Principles of Corporate Governance

Concept: Introduced in 1999, revised in 2015 and 2023, these principles by the OECD guide corporate governance for companies and regulators, emphasizing transparency, accountability, and stakeholder rights.

Key Principles:

• Ensure effective governance frameworks.
• Protect shareholder rights (e.g., voting, information access).
• Equitable treatment of shareholders, including minorities.
• Transparency in financial reporting and board accountability.
• Stakeholder engagement (employees, communities).

Importance: Enhances investor confidence and market stability. Widely adopted in developed and emerging economies.
Relevance to Nepal: Influences Nepal’s Companies Act, 2063, especially for public companies. Supports FDI (~NPR 19B in 2024) by ensuring transparent governance in sectors like hydropower.
Example: A public bank like Nabil adopts OECD principles, ensuring minority shareholder rights and transparent audits, attracting foreign investors.

5. ISO 37000 (Governance of Organizations)

Concept: Launched in 2021 by ISO, ISO 37000 provides a global standard for organizational governance, focusing on ethical leadership, accountability, and sustainability.

Key Elements:

• Purpose-driven governance aligned with organizational values.
• Accountability and transparency in decision-making.
• Stakeholder inclusivity and risk management.
• Ethical culture and compliance systems.

Importance: Offers a universal framework for governance, applicable to all organizations. Complements standards like OECD principles.
Relevance to Nepal: Supports Nepal’s private sector in adopting global best practices, vital for SMEs and public firms in tourism (~7% GDP) and banking.
Example: A tourism company in Pokhara uses ISO 37000 to ensure ethical marketing and eco-friendly practices, enhancing trust among international tourists.

Similarities

Aspect	UNGC	SA 8000	ILO Standards	OECD Principles	ISO 37000
Core Objective	Promote ethical, sustainable business practices	Ensure ethical workplace conditions	Protect workers’ rights globally	Enhance corporate governance	Foster ethical organizational governance
Ethical Focus	Emphasizes human rights, labor, environment, anti-corruption	Focuses on ethical labor practices	Centers on labor rights and decent work	Promotes transparency and accountability	Prioritizes ethical leadership and values
Voluntary Adoption	Voluntary principles for businesses	Voluntary, certifiable standard	Binding for ratifying countries (voluntary elements exist)	Voluntary guidelines for companies/governments	Voluntary standard for organizations
Stakeholder Inclusion	Engages businesses, employees, communities	Protects workers, involves management	Focuses on workers, unions, employers	Includes shareholders, stakeholders	Considers all stakeholders (employees, communities)
Global Applicability	Applicable worldwide, aligned with SDGs	Global standard for supply chains	Universal labor standards	Used in developed/emerging markets	Universal for all organizations
Relevance to Nepal	Supports SDGs, anti-corruption (CPI ~110)	Addresses labor issues in carpets, tea	Aligns with Nepal’s 11 ratified conventions	Influences Companies Act, 2063 for FDI	Enhances governance in SMEs, tourism
Example in Nepal	Hydropower firm adopts eco-friendly practices	Carpet factory eliminates child labor	Garment factory allows unions	Bank ensures shareholder rights	Tourism firm promotes ethical marketing

Differences

Aspect	UNGC	SA 8000	ILO Standards	OECD Principles	ISO 37000
Scope	Broad: human rights, labor, environment, anti-corruption	Narrow: workplace conditions, labor rights	Specific: labor and employment rights	Corporate governance for companies/markets	Governance for all organizations (broader than OECD)
Origin/Issuer	UN (2000)	Social Accountability International (1997)	ILO (UN agency, 1919)	OECD (1999, revised 2023)	ISO (2021)
Nature	10 principles, non-certifiable	Certifiable standard	Conventions/recommendations (some binding)	Policy guidelines	Certifiable governance standard
Primary Focus	Sustainability and ethics across operations	Worker welfare, supply chain ethics	Labor rights and workplace standards	Shareholder rights, board accountability	Ethical leadership, purpose-driven governance
Enforcement	Self-reporting, no formal audits	Third-party audits for certification	Ratified conventions enforced by countries	Adopted by governments/companies, no audits	Audits for certification, voluntary adoption
Key Elements	4 areas: human rights, labor, environment, anti-corruption	9 elements: child labor, wages, safety, etc.	Freedom of association, no forced/child labor	Transparency, shareholder equity	Purpose, accountability, stakeholder inclusivity
Nepal-Specific Issue	Tackles corruption, environmental risks (e.g., Himalayan conservation)	Targets child labor in industries like tea (~20% child labor in some sectors)	Addresses labor disputes in garments	Supports FDI (~NPR 19B, 2024) via governance	Enhances SME ethics in tourism (~7% GDP)

Common Importance in Nepal 

These international standards collectively enhance Nepal’s business environment, addressing local challenges like corruption, labor exploitation, and environmental risks while aligning with global best practices. Their common importance includes:

1. Economic Growth: They attract foreign direct investment (FDI, ~NPR 19B in 2024) by ensuring ethical and transparent practices, vital for sectors like hydropower and tourism (~7% GDP). Example: A bank adopting OECD principles gains investor trust through transparent audits.
2. Labor Rights Protection: Standards like SA 8000 and ILO conventions reduce exploitation (e.g., child labor, ~20% in some sectors) in industries like garments and tea, ensuring fair wages and safe conditions. Example: A Kathmandu garment factory implements ILO standards, allowing unions and improving safety.
3. Anti-Corruption Measures: UNGC and ISO 37000 promote transparency, tackling Nepal’s corruption issues (CPI rank ~110 in 2024) and cronyism in business-political ties. Example: A hydropower firm avoids political donations, aligning with UNGC principles.
4. Sustainability and Environmental Protection: They encourage eco-friendly practices, critical for Himalayan conservation and climate resilience in Nepal’s agriculture and tourism sectors. Example: A tourism firm in Pokhara adopts ISO 37000 for sustainable practices, preserving trekking routes.
5. Global Market Credibility: Compliance with these standards enhances Nepal’s export competitiveness (e.g., carpets, tea) by meeting international ethical requirements. Example: A Bhaktapur carpet factory with SA 8000 certification gains European market trust.
6. Social Development: CSR initiatives aligned with UNGC and ISO 37000 support poverty reduction (~20% population) and community welfare, such as education and health projects. Example: Post-2015 earthquake, firms fund school rebuilding, aligning with UNGC goals.
7. Stakeholder Trust: Transparent governance (OECD, ISO 37000) and ethical labor practices (SA 8000, ILO) build trust among shareholders, employees, and communities. Example: Nabil Bank’s adherence to OECD principles ensures minority shareholder rights, boosting confidence.
8. Regulatory Alignment: These standards influence Nepal’s laws (e.g., Companies Act, 2063) and NRB directives, strengthening governance frameworks for public companies and banks. Example: A public company adopts OECD-inspired audit committees, ensuring compliance.
9. Post-Crisis Recovery: They support ethical rebuilding and economic stability after disasters like the 2015 earthquake or 2023 Jajarkot earthquake by prioritizing fair labor and community support. Example: A construction firm follows ILO standards for safe worker conditions during rebuilding.