Corporate business ethics and governance

a) Business ethics

Collapses of renowned businesses such as Lehman Brothers, Worldcom, Enron indicate that there
were managers behaving unethically in business organizations.

Ethics is the code of moral principles and values that governs the behaviors of a person or group with
respect to what is right or wrong (Daft,2012).

Business ethics is the application of general ethical principles to the actions and decisions of
businesses and the conduct of their personnel. (Thompson,2012). Ethical principles of business are
not materially different from ethical principles in general because business actions have to be judged
in the context of societys standards of right or wrong.

It is important to know where Ethical standards come from. One school of thought is ethical
universalism which holds that common understandings across multiple cultures and countries about
what constitutes right or wrong give rise to universal ethical standards that apply to members of all
societies, all companies and all business people.

Apple Inc has supplier code of conduct that applies to suppliers across the globe. This has specified
standards on underage labor, work time and minimum pay, work environment, environmental
assessment etc. Apple regularly conduct audit in supplier location to see whether the standards are
met.

Another school of thought is ethical relativism which holds that differing religious beliefs, customs
and behavioral norms across countries and cultures give rise to multiple sets of standards concerning
what is ethically right or wrong. These differing standards mean that whether business-related actions
are right or wrong depends on the prevailing local ethical standards.

According to integrated social contracts theory, universal ethical principles takes precedence to the
local ethical principles.

Drivers of unethical business behaviours;
Lack of oversight which allows individuals to have personal gain, act for self interest
Heavy pressures to meet or beat shortterm performance targets
Company culture that puts profitability and business performance ahead of ethical behavior

Why should company strategies be ethical?
The moral case for ethical stratggy
Business case for ethical strategy
Visible costs; Government fines and penalities, costs to shareholders by lowering price
Internal admin costs; legal and investigative costs, costs of providing remedial education and
training, costs of taking corrective actions
Intangible costs; customer defections, loss of reputation, lost employee morale, high employee
turnover, adverse effects on employee productivity.






b) Corporate governance


Corporate governance broadly refers to the mechanisms, processes and relations by which
corporations are controlled and directed.

Governance structures identify the distribution of rights and responsibilities among different
participants in the corporation (such as the board of directors, managers, shareholders, creditors,
auditors, regulators, and other stakeholders) and includes the rules and procedures for making
decisions in corporate affairs.
Corporate governance includes the processes through which corporations' objectives are set and
pursued in the context of the social, regulatory and market environment. Governance mechanisms
include monitoring the actions, policies and decisions of corporations and their agents. Corporate
governance practices are affected by attempts to align the interests of stakeholders


There has been renewed interest in the corporate governance practices of modern corporations,
particularly in relation to accountability, since the high-profile collapses of a number of large
corporations during 20012002, most of which involved accounting fraud; and then again after the
recent financial crisis in 2008. Corporate scandals of various forms have maintained public and
political interest in the regulation of corporate governance. In the U.S., these include Enron and MCI
Inc. (formerly WorldCom). Their demise is associated with the U.S. federal government passing the
Sarbanes-Oxley Act in 2002, intending to restore public confidence in corporate governance.

Principles of corporate governance

Contemporary discussions of corporate governance tend to refer to principles raised in three
documents released since 1990: The Cadbury Report (UK, 1992), the Principles of Corporate
Governance (OECD, 1998 and 2004), the Sarbanes-Oxley Act of 2002 (US, 2002). The Cadbury and
OECD reports present general principles around which businesses are expected to operate to assure
proper governance. The Sarbanes-Oxley Act, informally referred to as Sarbox or Sox, is an attempt by
the federal government in the United States to legislate several of the principles recommended in the
Cadbury and OECD reports.
Rights and equitable treatment of shareholders: Organizations should respect the rights of
shareholders and help shareholders to exercise those rights. They can help shareholders
exercise their rights by openly and effectively communicating information and by encouraging
shareholders to participate in general meetings.
Interests of other stakeholders. Organizations should recognize that they have legal,
contractual, social, and market driven obligations to non-shareholder stakeholders, including
employees, investors, creditors, suppliers, local communities, customers, and policy makers.
Role and responsibilities of the board: The board needs sufficient relevant skills and
understanding to review and challenge management performance. It also needs adequate size
and appropriate levels of independence and commitment.
Integrity and ethical behavior: Integrity should be a fundamental requirement in choosing
corporate officers and board members. Organizations should develop a code of conduct for
their directors and executives that promotes ethical and responsible decision making.
Disclosure and transparency: Organizations should clarify and make publicly known the
roles and responsibilities of board and management to provide stakeholders with a level of
accountability. They should also implement procedures to independently verify and safeguard
the integrity of the company's financial reporting. Disclosure of material matters concerning
the organization should be timely and balanced to ensure that all investors have access to
clear, factual information.
Corporate governance models

Anglo-American "model" tends to emphasize the interests of shareholders.
The coordinated or Multistakeholder Model associated with Continental Europe and Japan also
recognizes the interests of workers, managers, suppliers, customers, and the community

Mechanisms and controls

1. Internal corporate governance controls
Monitoring by the board of directors, Internal control procedures and internal auditors, Balance of
power, Remuneration, Monitoring by large shareholders and/or monitoring by banks and other large
creditors

2. External corporate governance controls
External corporate governance controls encompass the controls external stakeholders exercise over
the organization. Examples include:
competition
debt covenants
demand for and assessment of performance information (especially financial statements)
government regulations
managerial labour market
media pressure
takeovers
3. Financial reporting and the independent auditor

Corporate governance and firm performance

Owner controlled firms significantly outperform manager controlled firms

Stulz (1988)

low levels of management ownership, increased equity holdings improve convergence enhance
firm value
At higher levels of insider ownership, managerial entrenchment prevents takeovers decrease
firm value