Business Finance · Corporate governance and the regulation of companies

Ethics, Social Responsibility and Governance Failures in Companies

Updated 11 October 2026 · Fact-checked

This topic covers how companies behave ethically, meet duties to society through corporate social responsibility (CSR), protect whistleblowers, and why governance fails. To answer, define the concept, link it to stakeholders and agency conflict, use a real failure such as Satyam or Enron as evidence, and recommend specific controls.

Understand Ethics, Social Responsibility and Governance Failures

Ethics means standards of right and wrong that guide behaviour beyond what the law strictly requires. A company can break no law and still act unethically. Business ethics asks how managers and directors should treat shareholders, employees, customers, lenders and society.

Corporate social responsibility (CSR) is the idea that a company owes duties to stakeholders beyond maximising shareholder profit. Two views are common. The shareholder view says the firm's job is to create value for owners within the law. The stakeholder view says the firm must balance the interests of all groups affected. In India, the Companies Act 2013 makes CSR a legal matter for larger companies: section 135 requires qualifying companies to form a CSR committee and spend a set share of average profits on CSR activities, or explain why they did not. Know the idea and the comply-or-explain flavour. Check exact thresholds in your study material before quoting numbers.

Whistleblowing is when an employee or other insider reports wrongdoing, such as fraud or false accounts. Good governance gives a safe route: a vigilance or whistleblower policy, access to the audit committee, and protection against retaliation. Without this, staff stay silent and problems grow.

Governance failures usually share causes. These include a dominant chief executive, a weak or captured board, poor internal control, aggressive accounting, pay that rewards short-term results, and auditors who are not independent in practice. Enron (USA) hid debt through off-balance-sheet entities and inflated profits. Satyam (India) reported fictitious cash and revenue for years until the chairman admitted it in 2009. Both show agency problems: managers acted for themselves, and monitors did not stop them.

For the exam, treat each scandal as a case study. Name the failure, the cause, the harm to stakeholders, and the control that would have helped.

Key rules to remember

Shareholder view of the firm: Duty = maximise shareholder wealth within the law; Contrast this with the stakeholder view when you discuss CSR.
Stakeholder view of the firm: Duty = balance the interests of all affected groups; Groups include employees, customers, lenders, suppliers, society and the environment.
Companies Act 2013, section 135: Qualifying company → CSR committee + CSR policy + spend on CSR from average profits, or explain non-spend; State it in words. Check thresholds and percentages in your study material before using numbers.
Typical causes of governance failure: Dominant leader + weak board + weak controls + bad incentives + weak audit; Use this as a checklist when analysing any scandal.
Whistleblowing framework: Policy + safe channel + protection + independent follow-up; Use it to structure recommendations.

How to solve Ethics, Social Responsibility and Governance Failures questions

Use this order for any written question on ethics, CSR or governance failures.

1Read the command word. Define, explain, discuss and recommend need different depth.
2Define the key term in one or two sentences, such as ethics, CSR or whistleblowing.
3Identify the stakeholders involved and what each gains or loses.
4Name the conflict, usually an agency problem between managers and owners, or a clash between profit and social duty.
5Bring in evidence: a case such as Satyam or Enron, or the section 135 CSR rule. Use only facts you are sure of.
6Give both sides where the question says discuss, for example costs and benefits of CSR.
7Recommend specific controls: independent directors, audit committee, whistleblower policy, ethics code, better pay design.
8Close with a one-line conclusion that answers the question asked.

Quickest way: Define, Stakeholders, Cause, Fix

When to use it: Use this for MCQs and short written parts when time is tight.

Define the term in one sentence.
List who is affected.
State the root cause: weak board, weak control, bad incentive or silence of insiders.
Give one control that fixes it.
For MCQs, remove options that say the law alone guarantees ethical behaviour or that CSR always lowers value.

Common mistakes in Ethics, Social Responsibility and Governance Failures

Treating ethics and legal compliance as the same thing.
Students assume that if an act is legal it is ethical.
Fix: Say that ethics goes beyond the law. A legal act can still be unethical, and rules often follow scandals.
Presenting CSR only as charity or a cost.
Section 135 spending looks like a donation.
Fix: Explain the wider purpose: reputation, licence to operate, employee and customer loyalty, and long-term value. Also give the shareholder-view criticism.
Quoting section 135 details from memory that may be wrong.
Students try to recall thresholds and percentages.
Fix: Describe the rule in words: committee, policy, spending from profits, comply or explain. Quote numbers only if you are sure.
Retelling a scandal without analysis.
Case stories are easy to remember and write.
Fix: For each case give cause, harm and the control that would have helped. Marks go to analysis.
Ignoring whistleblowing protection.
Students focus on boards and audit.
Fix: Mention a safe channel, protection from retaliation and follow-up by the audit committee.
Blaming only the chief executive in a failure.
One person is the face of the scandal.
Fix: Show that the board, auditors, controls and incentives also failed, so the problem was systemic.

Worked examples

Example 1

Discuss the arguments for and against a company spending on corporate social responsibility.

Show the solution

Define CSR: a company's duties to stakeholders and society beyond profit and legal minimums.
For: it builds reputation, helps attract staff and customers, reduces risk of regulatory or social conflict, and supports long-term value.
For: in India, section 135 of the Companies Act 2013 requires qualifying companies to have a CSR committee and spend or explain, so it is also a compliance matter.
Against: the shareholder view says money spent on CSR is owners' money and managers should not decide social causes with it.
Against: CSR can become a cover for poor performance or weak governance, and benefits are hard to measure.
Balance: CSR linked to the business and monitored by the board can add value. Unfocused spending may not.

Answer: CSR can raise long-term value through reputation, staff and customer loyalty and lower risk, and in India qualifying companies must follow section 135. Critics say it uses owners' funds, is hard to measure and can mask weak management. It works best when linked to strategy and overseen by the board.

Example 2

Explain how weak governance contributed to the Satyam scandal and recommend three controls to prevent a repeat.

Show the solution

State the facts safely: in 2009 Satyam's chairman admitted that the company's accounts had overstated cash and profits for years.
Identify causes: a dominant founder-chairman, a board that did not challenge him, weak internal control over cash and revenue, and external audit that did not detect the fraud.
Link to agency theory: management acted against shareholders and other stakeholders, and monitoring failed.
Name the harm: investors lost trust, employees and clients faced uncertainty, and market confidence in Indian governance fell.
Control 1: a truly independent board and audit committee that tests management claims, including direct contact with auditors.
Control 2: strong internal audit and independent confirmation of bank balances.
Control 3: a whistleblower policy with a safe channel and protection, so insiders can report concerns.

Answer: Satyam failed because power was concentrated in one chairman, the board and auditors did not challenge false figures, and controls were weak. Independent directors with an active audit committee, strong internal audit with external verification of cash, and a protected whistleblowing channel would reduce the risk of repeat.

Exam tips

Link every governance failure to agency theory and stakeholder harm. Examiners reward the link.
Learn two cases well, one Indian and one international, with cause, harm and fix for each.
Describe section 135 in words and avoid unsure numbers.
For discuss questions, write both sides and end with a short judgement.
In MCQs, beware absolute words such as always and only. Ethics and CSR answers are rarely absolute.

Practice questions from Corporate governance and the regulation of companies

Ethics, Social Responsibility and Governance Failures in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Ethics, Social Responsibility and Governance Failures: frequently asked questions

What does section 135 of the Companies Act 2013 require?

It requires qualifying companies to set up a CSR committee of the board, adopt a CSR policy and spend on CSR activities from a share of average profits. If the company does not spend the amount, it must explain why. Check current thresholds in your study material.

What is the difference between ethics and law?

Law sets the minimum standard that is enforced by the state. Ethics covers what is right even where no law applies. A company can be legal but still unethical.

Why is whistleblowing important in governance?

Insiders often see fraud before outsiders do. A safe channel and protection from retaliation let them report it early. This reduces losses and supports the audit committee's role.

What do Satyam and Enron have in common?

Both involved false or misleading financial reporting over a long period. Both had dominant leaders, weak board challenge and failure of monitoring. Both damaged stakeholders and led to calls for stronger governance rules.