Ethics in Public and Private Institutions

Ethics is not only for the individual; it also applies to the institutions in which we work. The GS Paper 4 syllabus of the UPSC Civil Services Examination includes "ethics in public administration", "ethical concerns and dilemmas in government and private institutions", "laws, rules, regulations and conscience as sources of ethical guidance", "accountability and ethical governance" and "corporate governance". Questions are usually about the difference between ethics in the public and private sectors, conflict of interest, corporate social responsibility (CSR), whistle-blowing and the role of laws and conscience. This note explains these concepts, with examples from India and a method for using them in answers and case studies, in simple language.

Ethics in Public Institutions

A public institution works for the public interest and uses public money and power. Therefore, public servants are expected to follow higher standards: integrity, impartiality, objectivity, accountability, transparency, selflessness and responsiveness (the Nolan Principles of public life). Ethical concerns in the public sector include corruption and bribery, nepotism and favouritism, misuse of official position and resources, political interference, lack of transparency, poor service delivery and indifference towards the poor, and the culture of "file pushing" and fear of taking decisions. Ethical dilemmas arise when a civil servant must decide between obeying an order and following the law, between the need of a friend or family and public duty, or between speed and procedure.

Ethics in Private Institutions

A private business exists to earn profit, but it also serves customers, employees, shareholders, suppliers and society. Ethical concerns include false advertising, selling unsafe products, cheating in accounting and taxes, exploiting workers (low wages, unsafe conditions, child labour), harming the environment, bribing officials, insider trading, misuse of customer data and the lack of transparency to investors. Two views exist about the duty of business. The shareholder theory (Milton Friedman) says that the main responsibility of a company is to increase profits within the law. The stakeholder theory says that a company has duties to all those affected by its work. In India, the law and public opinion increasingly support the stakeholder view.

Public vs Private Sector Ethics

Despite the differences, both must follow the law, protect human dignity, avoid conflict of interest and be honest in their dealings. The two sectors also interact, for example in public-private partnerships (PPPs), where weak ethics in contracts, tenders and regulation can lead to scandals.

Conflict of Interest

A conflict of interest arises when the private interest of a person (such as the interest of a relative, a friend or a business) interferes or appears to interfere with their official duty. It can be actual, potential or perceived. Examples include an officer who sits on a committee that selects a company owned by a relative, a regulator who later joins the company he regulated (the "revolving door") and a director who uses company information for personal trade. Ways to manage it include disclosure of assets and interests, recusal from the decision, rules on gifts and post-retirement jobs, ethics committees and strong penalties. In a case study, the first step is to disclose and avoid participation in the decision.

Corporate Governance

Corporate governance is the system of rules, practices and processes by which a company is directed and controlled, to ensure fairness, transparency and accountability to all stakeholders. Its key principles are accountability of the board, transparency and disclosure, fairness to all shareholders (including small investors), responsibility towards society and independence of the audit. Its main elements in India include:

• The Board of Directors: responsible for strategy and oversight; the Companies Act, 2013 requires at least one woman director in specified companies and independent directors in listed companies; the SEBI rules (Listing Obligations and Disclosure Requirements) set the standards for listed companies, such as the share of independent directors on the board.
• Independent directors and audit committees to check the management.
• Statutory audit and internal audit, with the regulation of auditors by the National Financial Reporting Authority (NFRA).
• Disclosure norms: regular reporting of financial results, related-party transactions and risks, and the Business Responsibility and Sustainability Report (BRSR) for large listed companies.
• Vigil mechanism (whistle-blower policy) in companies to report wrongdoing without fear.

The reports of the Kumar Mangalam Birla Committee (1999) and the N. R. Narayana Murthy Committee (2003) on corporate governance shaped these rules. Frauds such as the Satyam scandal (2009), where the founder admitted to inflating the accounts by thousands of crores of rupees, the IL&FS crisis and the bank frauds led to stricter checks. Good governance protects investors, builds trust and helps companies to raise funds and grow.

Corporate Social Responsibility (CSR)

CSR is the idea that businesses should contribute to the society and the environment in which they operate. India is the first country to have made CSR spending mandatory by law. Section 135 of the Companies Act, 2013 applies to companies with a net worth of 500 crore rupees or more, or turnover of 1,000 crore rupees or more, or net profit of 5 crore rupees or more in a financial year. Such companies must set up a CSR Committee and spend at least 2 percent of their average net profit of the last three years on activities listed in Schedule VII, such as eradicating hunger and poverty, education, health, gender equality, environmental sustainability, rural development, support to armed forces veterans and contributions to specified funds. The unspent amounts must be transferred to a designated account as per the amendments of 2021. CSR has helped build schools, health centres and water facilities, but critics point out that the spending is concentrated in a few states, is sometimes used for publicity, and focuses on short-term charity instead of long-term development. Good CSR means need-based projects, community participation, transparency and impact assessment.

Whistle-blowing

A whistle-blower is a person who reports wrongdoing, such as corruption, fraud or a safety risk, within an organisation. It takes moral courage because of the risk of retaliation. The Whistle Blowers Protection Act, 2014 provides a mechanism for complaints on corruption or misuse of power by public servants, and for protection of the complainant, but its rules and amendments are still pending, and many activists have faced threats. The Companies Act and SEBI rules require vigil mechanisms in companies. A civil servant facing such a situation should follow the proper channels: report to the competent authority in writing, keep evidence and seek protection, while avoiding rumours.

Laws, Rules, Regulations and Conscience

Ethical guidance comes from several sources. Laws and rules (the Constitution, statutes, conduct rules) give the minimum standard and are enforced by penalties. Regulations and codes provide detailed procedures. Conscience is the inner voice that guides when the rules are silent or unclear. The best approach is to follow the law and also reflect on whether the action is fair; if a law appears unjust, work to change it through proper means and do not break it. In a conflict between a rule and conscience, an officer should first seek clarification, explore alternatives within the law, and record the reasons for the decision. A decision that satisfies the law but not conscience should be avoided in public service, and a decision that satisfies conscience but breaks the law should not be taken without lawful authority.

Ethical Concerns in Governance and in International Relations

Ethical governance means that the government acts with honesty, fairness, transparency and care for the people. Tools include the Right to Information, citizen charters, social audits, e-governance, independent regulators and institutions such as the Lokpal and the Central Vigilance Commission. In international relations, ethical questions include the use of force and sanctions, humanitarian intervention, support to refugees, development aid with or without conditions, climate responsibility of rich and poor countries, and dealing with regimes accused of human rights violations. India's approach emphasises sovereignty, non-interference, peaceful settlement of disputes and the principle of "Vasudhaiva Kutumbakam" (the world is one family), along with its national interest.

How to Answer Questions on This Topic

Define the concept in one line, give two or three examples from India, explain the benefits and the limits, mention the relevant law or institution and conclude with a balanced way forward. In case studies, identify the stakeholders and the conflict of interest, disclose and recuse yourself if needed, follow the rules, choose the option that is lawful, fair and in the public interest and describe the steps for prevention in the future.

Quick Revision

• Public sector: service and accountability; private sector: profit with responsibility; stakeholder vs shareholder theory.
• Conflict of interest: disclose, recuse; revolving door; gifts and post-retirement rules.
• Corporate governance: board, independent directors, audit, disclosure; Birla and Narayana Murthy committees; Satyam 2009.
• CSR: Section 135, Companies Act 2013, 2 percent of the average net profit; Whistle Blowers Protection Act 2014.

Institutions can be as ethical or unethical as the people in them. Learn the concepts and laws, and always link them with real examples and with the values of integrity and public interest for a strong GS-4 answer.

Related Notes to Read Next

Continue your preparation with these related notes from the same subject:

• Conflict of Interest, Code of Ethics and Code of Conduct Notes
• Corporate Governance, CSR and Business Ethics Notes for UPSC
• Ethics and Human Values Notes for UPSC GS Paper 4
• All Ethics, Integrity and Aptitude notes

Frequently Asked Questions (FAQ)

What is corporate governance?

Corporate governance is the system of rules and practices by which a company is directed and controlled to ensure transparency, fairness and accountability to all stakeholders.

What is corporate social responsibility?

CSR is the idea that businesses should contribute to society and the environment, and in India large companies must spend a part of their profit on CSR activities under the Companies Act, 2013.

How much must companies spend on CSR in India?

Eligible companies must spend at least 2 percent of their average net profit of the last three years on CSR activities.

Which section of the Companies Act deals with CSR?

Section 135 of the Companies Act, 2013 deals with Corporate Social Responsibility.

What is conflict of interest?

A conflict of interest arises when a person’s private interests interfere with their official duties or decisions, affecting impartiality.

How can conflict of interest be managed?

It can be managed by disclosure, recusal from decisions, rules on gifts and post-retirement employment, ethics committees and penalties.

What is whistle-blowing?

Whistle-blowing is the act of reporting wrongdoing, such as corruption or fraud, in an organisation, often at some personal risk.

What is the Whistle Blowers Protection Act, 2014?

It is a law to protect persons who report corruption or misuse of power by public servants, though its full implementation is still awaited.

What is the difference between shareholder theory and stakeholder theory?

Shareholder theory says a company’s main duty is to maximise profit for shareholders, while stakeholder theory says it has duties to all those affected, including employees, customers and society.

What was the Satyam scandal?

In 2009, the founder of Satyam Computer Services admitted to inflating the company’s accounts, which exposed the weakness of corporate governance and audit.

What are the sources of ethical guidance?

The sources include laws, rules, regulations, codes of conduct and conscience.

Why is ethics in the private sector important?

Ethical behaviour in business builds trust, protects consumers and workers, supports long-term success and prevents fraud and harm to society.