The Nexus Between Corporate Governance and Ethics

WRITTEN BY:
NIBEDITA BEHERA 

Corporate governance and business ethics are not mutually exclusive concepts; rather, they work in close synergy to influence how Indian companies operate, govern, and make critical decisions. While governance provides the framework for accountability, ethics sets the normative standards that guide business practices.

Together, these two forces create an environment where decisions are made not just for profit, but for the benefit of all stakeholders involved—including shareholders, employees, and the community.

The Role of Culture and Leadership

Both concepts deeply influence organizational culture and leadership styles. A robust governance framework ensures fair treatment of all stakeholders, but it is the ethical undertone that promotes long-term success through integrity.

Why the Synergy Matters

The link between corporate governance and ethics is the “safety valve” for maintaining business transparency and sustainable management. In the wake of various financial irregularities, it has become clear that statutory compliance alone is insufficient. True governance requires an ethical core to foster the transparency and accountability necessary to prevent future scandals

WHAT IS CORPORATE GOVERNANCE?

Corporate governance establishes a framework through which the objectives of a company are set and monitored. Its main principles include:

[2]Corporate governance refers to the system of rules, processes, and relationships by which companies are directed and controlled. It ensures accountability, transparency, and fairness in dealing with stakeholders such as shareholders, managers, creditors, auditors, regulators, employees, customers, and society. The framework involves:

In essence, corporate governance is not just company administration but a management system and code of conduct that enables firms to achieve goals, maximize profits, and ensure long-term stakeholder trust.

The Satyam scandal, India’s biggest corporate fraud, intensified concerns about the need for stronger corporate governance. Internationally, corporate governance has been defined in key reports — the Cadbury Report (1992) described it as the system by which companies are directed and controlled, while the OECD Principles (1999) framed it as the set of relationships between management, the board, shareholders, and stakeholders that ensures accountability, performance monitoring, and efficient use of resources.

[3]In India, the statutory framework largely aligns with global best practices. The key components include:

The Companies Act, 2013, along with SEBI’s reforms and amendments to the Listing Agreement (effective October 2014), strengthened the framework by increasing disclosure requirements, enhancing minority shareholder rights, and reinforcing the accountability of boards. Additionally, corporate and investment advisory services now help shareholders and boards adapt to these reforms.

Overall, corporate governance in India today functions as a system of management and compliance that ensures stability, growth, and fairness. It places responsibility on top management, especially the board of directors, to protect the interests of all stakeholders and to maintain ethical, transparent, and sustainable business practices.

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AI-generated content may be incorrect.MAJOR CORPORATE SCANDALS IN INDIA

Corporate fraud consists of illegal or unethical and deceptive actions committed either by a company or an individual acting in their capacity as an employee of the company. Corporate fraud schemes are often extremely complicated and, therefore, difficult to identify. It often takes an office full of forensic accountants months to unravel a corporate fraud scheme in its entirety.

Some of the major corporate scandals are: –

  1. Satyam Computer Services Scandal (2009)

[4]The Satyam Computer Services scandal stands as one of India’s most infamous corporate frauds. In January 2009, the company’s chairman, Ramalinga Raju, admitted to falsifying financial statements over several years, inflating revenues, profits, and assets to the tune of over ₹7,000 crores. The scandal exposed serious lapses in board oversight, auditing practices, and regulatory monitoring, shaking investor confidence and highlighting systemic weaknesses in corporate governance.

[5]The Satyam Computer Services scandal of 2009 is often described as India’s “Enron moment.” Founded in 1987, Satyam grew rapidly into one of the country’s leading IT firms, earning international clients and even corporate governance awards. However, on 7 January 2009, its chairman, Ramalinga Raju, shocked the corporate world by confessing that the company’s financial statements had been falsified for years. Revenues and profits were grossly inflated, assets were overstated by thousands of crores, and liabilities were concealed. The methods of manipulation included fake bank statements, fictitious invoices, non-existent customer identities, and the creation of thousands of false salary accounts. Raju also attempted to mask the gaps by proposing controversial acquisitions of family-owned firms such as Maytas Infrastructure and Maytas Properties. Despite such large-scale fraud, the company’s board and its statutory auditors, PricewaterhouseCoopers, failed to detect the irregularities, raising serious questions about the efficacy of internal controls and independent oversight. The scandal led to a dramatic fall in Satyam’s share price, causing huge investor losses and undermining global confidence in Indian corporate governance. In response, the government dissolved the existing board, initiated multiple regulatory and criminal proceedings, and eventually facilitated a takeover by Tech Mahindra to rescue the firm. The case highlights fundamental weaknesses in corporate governance, including inadequate board vigilance, auditor negligence, and the prioritisation of market expectations over ethical responsibility, offering lasting lessons for the need to strengthen transparency and accountability in Indian companies.

Legal Proceedings:

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AI-generated content may be incorrect.Following the revelation of the fraud, numerous legal proceedings were initiated both in India and abroad. In India, the Central Bureau of Investigation (CBI), the Serious Fraud Investigation Office (SFIO), and the Enforcement Directorate (ED) have filed multiple cases against Raju and other executives, resulting in convictions, penalties, and imprisonment. Internationally, the U.S. Securities and Exchange Commission (SEC) filed civil actions against Satyam for overstating revenues and assets, while several class-action lawsuits were initiated by investors alleging securities law violations.

[6]This case illustrates how corporate governance failures, including inadequate board oversight, a lack of transparency, and auditor negligence, can result in both substantial financial losses and widespread legal repercussions. It serves as a landmark lesson for strengthening governance structures and regulatory compliance in Indian companies.

[7]The ripple effects of the Satyam fraud continued to surface even years later in taxation disputes. In Satyam Computer Services Ltd v Commissioner of Income Tax Central (Telangana High Court, 31 January 2025), the court held that tax authorities could not levy income tax on amounts that were fictitious or artificially created through fraudulent accounting practices. This judgment underscored that corporate fraud not only attracts criminal and regulatory sanctions but also has lasting consequences in areas such as taxation, where courts are compelled to reconcile fraudulent reporting with principles of fairness and genuine hardship. The case demonstrates how the legacy of corporate scandals extends far beyond immediate penalties, creating continuing legal and financial challenges for regulators, companies, and stakeholders alike.

[8]The Punjab National Bank (PNB) scam, one of India’s most significant financial frauds, came to light in early 2018. Orchestrated by billionaire jeweller Nirav Modi and his uncle Mehul Choksi, the fraud involved the unauthorized issuance of Letters of Undertaking (LoUs) by certain PNB officials at the bank’s Brady House branch in Mumbai. These LoUs, typically used to facilitate short-term credit for importers, were issued without proper documentation or collateral, allowing the accused to secure overseas credit from other Indian banks.

The modus operandi involved bypassing the bank’s Core Banking System (CBS) and the SWIFT messaging platform, which are integral to banking operations and regulatory oversight. By not recording these transactions in the CBS, the fraudulent activities went undetected for an extended period. The lack of integration between CBS and SWIFT, along with the absence of real-time monitoring mechanisms, facilitated the concealment of these illicit transactions.

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AI-generated content may be incorrect.  [9]Several factors contributed to the prolonged nature of the scam:

[10]The impact of the scam was multifaceted:

[11]In response to the fraud, several measures were proposed and implemented:

The PNB scam serves as a stark reminder of the vulnerabilities in banking operations and the critical importance of robust governance frameworks. It underscores the need for continuous vigilance, stringent regulatory oversight, and a culture of accountability to safeguard the integrity of financial institutions.

[12]Background and Launch: Kingfisher Airlines, launched in 2005 by Vijay Mallya’s United Breweries Group, aimed to revolutionize India’s aviation sector with a premium service model. Initially, it garnered attention for its luxurious offerings and celebrity endorsements.

Financial Mismanagement and Defaults:

  [13] Despite early promise, Kingfisher faced significant financial challenges:

            [14]Regulatory and Legal Actions

            The situation attracted scrutiny from various regulatory bodies:

              [15]Vijay Mallya’s Role and Legal Proceedings

              Vijay Mallya, the airline’s chairman, became a central figure in the controversy:

             Impact and Aftermath

             The Kingfisher Airlines debacle had far-reaching consequences:

KEY FAILURES IN GOVERNANCE LEADING TO SCANDALS

[16]One of the most glaring failures contributing to major corporate scandals in India is weak board oversight. Boards often lacked independence and failed to ask hard questions; in many cases, independent directors were nominal, and their role was more decorative than substantive. For example, under Section 149 of the Companies Act, 2013, a public company is required to have at least one-third independent directors, but studies show that in practice, many boards do not allow these independent members access to complete information or permit them meaningful participation in audit or risk-related discussions.

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AI-generated content may be incorrect.Transparency is another major failure. Corporate disclosures were often delayed, incomplete, or manipulated; financial reports concealed liabilities, inflated revenues, used fictitious bank statements, or masked related party transactions. Auditors and  committees sometimes overlooked red flags—owing to conflicts of interest, lack of due diligence, or simply insufficient information being made available to them.

[17]Conflict of Interest issues also emerge repeatedly in scandals. In several cases, companies made related-party transactions that benefited promoters or insiders, with insufficient oversight or disclosure. Sometimes, audit firms had continuing contracts or relationships with management that impaired audit independence. Also, senior executives or board members who had overlapping roles or shareholdings stood in positions where their interests diverged from those of minority shareholders or the company broadly.

Finally, poor regulatory compliance played a key role. Although regulations exist (through the Companies Act, SEBI LODR, etc.), there were failures in adhering to them. Audit committees were sometimes not constituted properly, internal control frameworks were weak, risk assessments were superficial, and whistleblower or vigilance mechanisms were absent or ineffective. Also, regulatory authorities often lacked resources or did not act swiftly. This created environments where unethical practices could grow unchecked until large-scale fraud occurred.

Legal Reforms & Measures Post Scandals

[18]After major scandals like Satyam, PNB, and Kingfisher, India introduced numerous reforms aimed at strengthening governance and improving regulatory enforcement The Companies Act, 2013 was a watershed moment: it introduced mandatory independent directors (Section 149), strengthened audit committees (Section 177), introduced rules for related-party transactions, and provided for stricter disclosures. It also mandated that companies meeting thresholds must have corporate social responsibility initiatives (Section 135) and introduced statutory obligations for whistleblower protection.

[19]SEBI also tightened norms: The LODR (Listing Obligations and Disclosure Requirements) Regulations, 2015 require listed companies to have more rigorous disclosure standards, provide better oversight of related party transactions, ensure audit committees are effective, and ensure independent directors meet eligibility criteria. Further, SEBI’s demands for certification by the CEO and CFO and timely financial reporting were strengthened.

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AI-generated content may be incorrect.Amendments to the Companies Act (such as the 2017 Amendment) also sought to decriminalise minor offences, rationalise penalties, and reduce regulatory burden while preserving compliance. Secretarial Standards issued by ICSI emphasize standardized practices for board meetings, general meetings, disclosures, and record-keeping. These norms reinforce internal governance mechanisms. Moreover, enforcement mechanisms have been enhanced: regulatory bodies like SEBI and MCA have increased investigations  penalization of non-compliance. Use of technology (for example, monitoring disclosures, automated tracking of regulatory filings) has been encouraged. Audit rotation (for auditors) has become more common in some sectors, adding another layer of independent review to avoid auditor complacency.

CURRENT CHALLENGES IN CORPORATE GOVERNANCE IN INDIA

[20]Despite significant legal reforms, multiple challenges persist. One major issue is the implementation gap: many companies formally comply with governance norms (e.g., having independent directors, audit committees), but in reality, these are often pro forma. Board meetings may lack depth of discussion, independent directors may not get access to full information, and risk committees may be inactive.

Another challenge is awareness issues among Small and Medium Enterprises (SMEs). Many SMEs are unaware of governance best practices or cannot afford a robust audit or compliance infrastructure. Regulatory requirements often cater more to large listed companies; many smaller companies remain outside strict oversight.

A further weak link is the role of independent directors. While the law prescribes criteria for eligibility, there are concerns about their actual independence, conflicts of interest, lack of sufficient domain expertise, and multiple directorships. Some independent directors are overburdened with too many companies, reducing effectiveness.

Enforcement issues remain severe. Regulators often have limited manpower, delays in investigations, legal appeals that drag on, and sometimes insufficient coordination among regulatory bodies (SEBI, MCA, RBI, SFIO). Weaknesses in punishment (penalties too low in some cases, or difficulty in recovery) dilute deterrence.

Also, cultural issues persist: in many firms, compliance is seen as a checklist, not as part of leadership and ethics. Board cultures that do not encourage dissent or question management decisions worsen oversight issues. Finally, rapid technological changes, global operations, and financial innovations pose new risks that regulations may not yet fully cover.

RECOMMENDATIONS FOR STRENGTHENING CORPORATE GOVERNANCE

[21]To further raise governance standards, India should consider deeper reforms. First, strengthening regulatory enforcement is critical: regulators need greater resources (staff, technological tools), clearer mandates, and faster adjudicatory processes. Possibly, creating a unified corporate governance regulator or stronger coordination among existing ones (MCA, SEBI, RBI, SFIO) could reduce delays and overlaps.

Second, enhancing the role of independent directors through stricter selection criteria (domain expertise, less overlap), regular performance evaluations, training and capacity building, and ensuring they have real access to information. Also, independent directors should have more powers to ask questions and challenge management.

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AI-generated content may be incorrect.Third, internal audit, risk management, and transparency should not be mere legal requirements, but deeply integrated into corporate culture. Firms should adopt robust internal control systems, ensure financial reporting is timely and accurate, disclose related party transactions fully, and publish risk assessment and ESG metrics.

Fourth, strong whistleblower protection and vigilant mechanisms are essential. Employees and stakeholders should have safe channels to report concerns; legal protections must assure them of no retaliation; companies should promote ethical reporting and follow up.

Fifth, move beyond mandatory CSR to integrate ESG (Environmental, Social, Governance) frameworks. Investors increasingly expect ESG disclosures; incorporating environmental impact, social responsibility, and governance practices into business strategy will help in long-term sustainability.

Sixth, for SMEs, there should be tailored governance guidance and support: simplified codes, capacity building, incentives for compliance (e.g., lower audit costs, recognition), so smaller firms are not left behind.

CONCLUSION

Corporate governance is not just a regulatory checklist—it is the foundation of trust, stability, and sustainable growth. The major scandals in India (Satyam, PNB, Kingfisher) have laid bare how failures in transparency, oversight, conflict management, and regulatory compliance can lead to catastrophic financial losses, legal fallout, and erosion of public trust. While legal reforms under the Companies Act, SEBI’s LODR, and other frameworks have strengthened the governance landscape, real change depends on more than laws—it requires culture, ethics, accountability, and effective enforcement. Looking ahead, companies must internalize governance as part of their identity, not just a duty. Only then will Indian corporate entities gain the resilience, credibility, and investor confidence necessary for long-term success.


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[9]mayank111kishore, ‘Failures of the Corporate Governance in PNB Heist | PDF | Audit | Banks’ (Scribd, 25 September 2025) <www.scribd.com/document/914408179/Failures-of-the-Corporate-Governance-in-PNB-Heist> accessed 18 September 2025.

[10]Sukhpreet Monga, ‘PNB Scam: Full Story, Impact on Banking, and Lessons Learned’ (PNB scam) <https://plutuseducation.com/blog/pnb-scam/> accessed 18 September 2025.

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