‘Business ethics is the heart of Corporate Governance’
Ethics is derived from the Greek word- ETHIKOS which means Character. The concept of ‘ethics‘ was introduced by Socrates, and defined as a philosophical discipline by Aristotle. Ethics is a system of moral principles. They affect how people make decisions and lead their lives. It is concerned with what is good for individuals and society and is also described as moral philosophy. We have derived our ethics from religions, customs, philosophies. According to Webster- “Ethics is the discipline dealing with what is good and bad and with moral duty and obligations”. It tells us how to live our lives, how to take responsibilities, the language of right and wrong, and what we call a morally right thing to do. Here, we care about others rather than indulging in our own self interests. We are more concerned about the society’s interest, and the ‘ultimate good’ he wants for everyone. Hence, we can say that ethics can be said to be the basic concepts and fundamental principles of decent human conduct.
When we talk about Business Ethics, it is a branch of ethics which prescribes standards of how the business is to be carried out. It lays down guidelines for the company’s response and accountability to its various stakeholders. It gives a deeper understanding of what is good and bad, what is moral and immoral or what actions are right or wrong in the operations of a business with respect to its customers, employees, investors, society and all other stakeholders – in order to protect them from harm and damages to their interests. According to Andrew Crane– “It is the study of business situations activities and decisions where issues of right and wrong are addressed”.
Its basically a set of values or we can say norms that are set for an organization or an institution which governs their functioning, actions and the behavior. It’s a code of conduct for the organization which a businessman should follow. They provide basic framework which tells them what should be the legal, social, cultural limits within which the businesses will function.
How Business ethics is relevant in corporate governance-
The word ‘Corporate Governance’ (CG) has become a buzzword these days due to various corporate failures world over in recent past. The Corporate Governance represents the value framework, the ethical framework and the moral framework under which business decisions are taken. In other words, when investment takes place across national borders, the investors want to be sure that not only their capital handled effectively and adds to the creation of wealth, but the business decisions are also taken in a manner which is not illegal or does not involve moral hazards. It denoted that there must be transparency, accountability and protection of public interest in the company’s management. It is rightly said- Good corporate governance leads to better accountability and transparency.
Business ethics plays an integral role in enhancing the corporate governance as both go hand in hand. If the corporation doesn’t have any business ethics they will not have good corporate governance which will lead to less accountability and will reduce the profitability of the business. Business ethics is the application of moral or ethical norms to business. Businesses must balance their desire to maximize the profits against the needs of the stakeholders. A well-defined and enforced corporate governance provides a Structure that, at least in theory, works for the benefit of everyone concerned by ensuring that the enterprises adheres to accepted ethical standards and best practices as well as to formal laws.
Merits-
1. Business ethics will ensure profitability to be around for a longer time. It will indirectly increase your goodwill of the company.
2. Sustainability is very important for the investments. A person cannot run a valuable business forgetting the ethics.
3. Young talents are aspired to join organizations which has high ethical values. The employees will be equally dedicated if they feel that same things are reciprocated by the company for their welfare. They create a trustworthy environment, making their workforce to feel motivated for their work.
4. Customer satisfaction is also a key aspect for a successful business strategy. The company should evoke respect among customers.
5. Investors invest in the company by seeing their reputation, in which they will invest. They will invest only when they will see the potential in that organization which will give them good returns on their investment, and this is possible with high business ethics.
Demerits-
1. Failure of personal character– Companies sometimes recruit workers whose personal values are not desirable. Such employees misuse funds, take unjustified leave, use inside information for their personal benefit. If a Company recruits such persons, it is not blamed for situation.
2. Conflict of personal values and organizational goal– To achieve objectives ineffective and ethical way, both individual goals (recognition, career opportunities etc.) and organizational goals (profits, reputation, increased sales etc.) should be integrated. The conflict of these goals leads to ethical dilemmas.
3. Organizational goals versus social values– In a fast-changing situation a company may find itself at odds against changing social values. For example-organizations follow a hierarchical setup on dress code, working hours’ relations of superior –sub-ordinate etc. But now, it is changed.
4. Personal beliefs versus organizational practices– Ethical dilemmas may arise in organizations when they employ multi-racial and multi-religious employees.
In today’s scenario the law and ethics are not one and the same. There have been cases where business ethics are not being followed by the organizations due to which there was no accountability in the company. There have been a number of scandals happening which are destroying the goodwill or reputation of the company and harming the rights of the stakeholders and not working to protect their interests.
There were many issues such as ethical issues- which means companies were indulging in fraudulent practices to achieve their motives irrespective of protecting the rights and thinking about the public welfare. They were taking unethical bribes, giving gift to potential customers and in return maximizing their own long term value. Accountability issues- which means when a company will not comply to its business ethics then they automatically default their stakeholder’s rights and are then accountable to them in providing transparency and full disclosure to them.
Then came the Sarbanes-Oxley Act of 2002. Sarbanes-Oxley laid out legal obligations for publicly traded and privately held corporations, with an aim to improving accountability. The act includes objective mandates such as auditor independence, enhanced disclosure and criminal fraud accountability, as well as subjective mandates like corporate responsibility. Corporations become legally obligated to follow a course of social compliance. Regulation falls on the Securities and Exchange Commission. It is easy to argue that some corporations make money through dealings in conflict with what is socially acceptable to the majority, but the theoretical purpose is the legal imposition of accountability.
Conclusion-
While law enforcement is reactive and remedial, ethics is the first line of defense against corruption. Rule-making by the government is only one aspect of good corporate governance. It also deals with ethics and the values that companies use to run their businesses. Therefore, it is all about the trust that is built up over time between businesses and their various stakeholders. A company’s failure is not guaranteed by good corporate governance practices. However, in the absence of such governance standards, questionable practices and massive corporate failures will undoubtedly occur. When it comes to making ethics work in an organization, it’s critical that the vision and mission statements, core values, general business principles, and code of conduct all work together. A program for ethics that works well needs to keep emphasizing good values. Associations are tested with how to make its representatives live and assimilate the association codes and values. Spirit and structure must coexist in the right proportions in order to maintain the ideal ethical climate.
Reference-
• ICSI and Taxmann Publication: “Corporate Governance”.
• A.C. Fernando: “Corporate Governance: Principles, Policies and Practices”
• K.R. Sampath: “Law of Corporate Governance: Principles and perspective”
• https://www.legalserviceindia.com/legal/article-8211-corporate-governance-and-business-ethics.html
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