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Corporate Governance and Business ethics

Corporate governance is the set of processes, customs, policies, laws, and institutions affecting the way a corporation (or company) is directed, administered or controlled. Corporate governance also includes the relationships among the many stakeholders involved and the goals for which the corporation is governed. Many of the "definitions" of corporate governance are merely descriptions of practices or preferred orientations. For example, many authors describe corporate governance in terms of a system of structuring, operating and controlling a company with a view to achieve long term strategic goals to satisfy shareholders, creditors, employees, customers and suppliers, and complying with the legal and regulatory requirements, apart from meeting environmental and local community needs. However, there is substantial interest in how external systems and institutions, including markets, influence corporate governance. Key elements of good corporate governance principles include honesty, trust and integrity, openness, performance orientation, responsibility and accountability, mutual respect, and commitment to the organization.

Corporate governance and business ethics
The primary objective of a corporation is to increase shareholder value. Successful corporations must operate within society; to that end, they must maintain the values and norms of the society in which they operate. Volkswagen has been the unfortunate recipient of a great deal of press time lately. In case you missed the details, it recently came to light that Volkswagen knowingly deceived the United States Environmental Protection Agency (EPA) with respect to nitrous oxide (NOx) engine emission for their TDI engines.

The company programmed the vehicles to favourably behave differently during EPA testing. The engines actually exceeded emission test levels during every day use by roughly 40 fold. The number of affected vehicles is not small – approximately 11 million cars worldwide. While the old adage goes that there is no such thing as bad publicity, the company's publically traded market share losses topped €14 billion during the fallout, suggesting otherwise.

The scandal has fueled the ire of those who question the altruism and decry the intent of big business. The scandal has thrown the subject of business ethics back into the spotlight. The corporations or organizations surgeons typically navigate are hospitals and universities – institutions held to strong social standards of ethical accountability. However, hospitals are not the only organizations we interact with.

We use the products of for-profit corporations and make decisions on behalf of our patients many times without them knowing a choice has been made. We have the good fortune of working with ethically strong corporate partners in a highly regulated industry, but Volkswagen has shown us it is both academically interesting and prudent in practice to understand the ethical tenets governing our corporate partners in patient treatment as they balance their efforts to advance medical research while increasing shareholder value.

Corporate Governance And The Law

At the end of the 20th century, public confidence in a corporation's ability to self- govern was low. A number of scandals had shaken the landscape and rattled investor confidence. Concerns about possible economic fallout prompted the United States House and Senate to enact the Public Company Accounting Reform and Investor Protection Act. This is better known as the Sarbanes-Oxely Act of 2002. Sarbanes-Oxely laid out legal obligations for publically traded and privately held corporations, with an aim to improving accountability. Canada followed suit with Bill C-198. It is identical in principle, albeit subtly varied in accountability and execution.

Oversight outlined in the act includes objective mandates such as auditor independence, enhanced disclosure and criminal fraud accountability, as well as subjective mandates like corporate responsibility. Sarbanes-Oxely and C-198 place the responsibility for steering corporate governance firmly on the board of directors and upper management. 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.

Ethics Versus The Law

The law and ethics are not one and the same. Although the law can guide ethical behaviour through Sarbanes-Oxely by laying out a framework, ethicists are quick to point out that the law should be thought of as the bare minimum of an ethical framework. Complying with the law and behaving ethically are not necessarily synonymous.

While Sarbanes-Oxely and C-198 specifically state that destroying evidence or fraudulent behaviour is illegal, they do not state that the series of questionable decisions that led to the fraud is as well. To guide the behaviour of the corporation, management must turn to the field of business ethics. In the case of Volkswagen, the execution of the deceptive computer program at the EPA emissions test laboratory is where the law was broken, the act of which carries punitive fines and penalties based on the retributions of crime and punishment.

The work that preceded that breach and the culture of deception that brought it to fruition constitutes a slew of ethical violations according to social standards.

Normative Directives In Ethics

Philosophical ethics has different fields of study. Normative ethics focuses on right and wrong. It is generally concerned with applying a framework of moral code on a decision. Descriptive ethics, on the other hand, looks at the understanding of an underlying moral belief. The field of business ethics is principally focused on steering a corporation toward doing right and away from doing wrong. It is principally normative. The field of business ethics attempts to guide corporations through ethically difficult decisions.

Business Ethics In Overview

The field of business ethics is not recently new but is relatively new. It arose in the 1970s and slowly gained acceptance as an academic discipline and practice through the decades that followed. Business ethics is temporal, that is to say that the guiding principles that arise through study may vary over time. While some principles remain concrete, social norms may vary over time, forcing once- acceptable practices into obsolescence.

The environmental movement and the recognition that we are destroying our planet may have changed the public's perception of fossil fuel consumption. When the automobile industry first arose, burning more gas to glean more power was embraced, now efficiency and minimizing emissions is the more acceptable standard. While some might believe that it is intuitively obvious that a corporation should be ethically constrained to act within the norms of society, the pure advocates of unadulterated capitalism don't necessarily agree.

There are those who argue ethical constraints are unnecessary and harmful. They believe that the progress of a corporation is impeded through constraint and, as such, the advancement of the corporation toward its goals are restricted. The argument follows that society as a whole suffers as progress – medical, technical or otherwise – is stunted. While this view may seem extreme, the business literature suggests that is not entirely the case. In fact, in an international study in 2011 (1), only 30% to 80% of high management believed that a corporation had an obligation to do well by society in addition to making shareholder's more money.

The areas of an organization potentially subject to ethical analysis are practically unlimited. Human resources, contract negotiations, new business development, accounting and finance, can all be subject to ethical analysis and constraint. What arises over time is a corporate culture that falls under the umbrella of the values of the corporation. The corporation begins to adhere to organization ethics but also can self-define an operating culture in alignment with society.

Corporate Social Responsibility

Corporations began touting their ethical behaviour and integrity as a value add for consumers through the 1990s. Since that time, the term 'corporate social responsibility' (CSR) has gained a great deal of traction. CSR extends beyond legal compliance and, as a philosophy, suggests that corporations can give back to the societies in which they operate even if this return decreases profit. This idea has both is advocates and its detractors.

The detractors believe that this isn't the role of a business and that businesses should stick to what they know: profit. Expanding their focus away from the core business weakens their benefit to the economy and decreases their utility to society. Those who support CSR principally believe that operating with a social conscience aligns corporations with the values of its customers and increases long- term profits. This belief can arguably lead to a degree of cynicism with regard to the altruism of the motivation; if the focus is on profit then isn't CSR merely a tool for self-promotion and increased shareholder value?

Altruism And Hidden Economic Gain

Take Volkswagen as an example. The low emissions diesel engine was touted as a win for the environment. Diesel engines consume less fuel and, if emissions comply with regulation, there is environmental advantage through their purchase and use. This advantage was not lost on Volkswagen and the cars were successfully marketed to consumers who valued this feature. The company benefited in reputation and in profit by embracing socially responsible values. Unfortunately, that reputation belied the truth. This is a classic example, in which the ethical culture of the corporation was at opposition to the CSR that it touted.


Principles of corporate governance
  • 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 effectively communicating information that is understandable and accessible and encouraging shareholders to participate in general meetings.
     
  • Interests of other stakeholders:
    Organizations should recognize that they have legal and other obligations to all legitimate stakeholders.
     
  • Role and responsibilities of the board:
    The board needs a range of skills and understanding to be able to deal with various business issues and have the ability to review and challenge management performance. It needs to be of sufficient size and have an appropriate level of commitment to fulfill its responsibilities and duties. There are issues about the appropriate mix of executive and non-executive directors.
     
  • Integrity and ethical behaviour:
    Ethical and responsible decision making is not only important for public relations, but it is also a necessary element in risk management and avoiding lawsuits. Organizations should develop a code of conduct for their directors and executives that promotes ethical and responsible decision making. It is important to understand, though, that reliance by a company on the integrity and ethics of individuals is bound to eventual failure. Because of this, many organizations establish Compliance and Ethics Programs to minimize the risk that the firm steps outside of ethical and legal boundaries.
     
  • Disclosure and transparency:
    Organizations should clarify and make publicly known the roles and responsibilities of board and management to provide shareholders 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.

Issues in Corporate Governance
Corporate governance addresses three basic issues:
  • Ethical issues
  • Efficiency issues
  • Accountability issues

Ethical issue
This is concerned with the problem with fraud, which is becoming wide spread in capital economies. Corporation often fraudulent means to achieve their goals. They form cartels to exert tremendous pressure on the government to formulate public policy. Which may sometime go against the interests of individuals and society at large? At times corporation may resort to unethical means like bribes, giving gift to potential customers and lobbying under the cover of public relations in order to achieve their goal of maximizing long term owner value.

Efficiency issues
These are concerned with the performance management. Management with responsible for ensuring reasonable return on investment made by shareholders. In developed countries, individuals usually invest money through mutual, retirement, and tax fund in India. However, small shareholders are still an important source of capital for corporation is mutual funds industry is still emerging. This issues relating to efficiency relating to management is of concerned to shareholders as there is no control mechanism through which they can con troll the activities of the management, whose efficiency is detrimental for return on their investments.

Accountability issues
The management of corporation is accountable to its various stakeholders. This is emerging out of the stakeholders need for transparency of management in the conduct of business. Since the activities of a corporation influence the workers, customer and society at large, some of the accountability issues are concerned with the social responsibility that a corporation must shoulder.
  • The growth of private companies.
  • The magnitude and complexity of corporate groups.
  • The important of institutional investors.
  • Rise in hostile activities of predators.
  • Insider trading.
  • Litigation against directors

Business Ethics
Business ethics (also known as corporate ethics) is a form of applied ethics or professional ethics that examines ethical principles and moral or ethical problems that arise in a business environment. It applies to all aspects of business conduct and is relevant to the conduct of individuals and entire organizations. Business ethics has both normative and descriptive dimensions. As a corporate practice and a career specialization, the field is primarily normative.

Academics attempting to understand business behavior employ descriptive methods. The range and quantity of business ethical issues reflects the interaction of profit-maximizing behavior with non-economic concerns. Interest in business ethics accelerated dramatically during the 1980s and 1990s, both within major corporations and within academia. For example, today most major corporations promote their commitment to non-economic values under headings such as ethics codes and social responsibility charters.

Adam Smith said, "People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices." Governments use laws and regulations to point business behavior in what they perceive to be beneficial directions. Ethics implicitly regulates areas and details of behavior that lie beyond governmental control. The emergence of large corporations with limited relationships and sensitivity to the communities in which they operate accelerated the development of formal ethics regimes.

Benefits of good business ethics
Note the use of the word „earned‟, this means that true goodwill is earned and not purchased. Forget about the accounting goodwill here. Some of the tangible benefits that accrue a company for operating on an ethically sound business values are:

Going concern assured
Being profitable will ensure that the company be around for at least the next twelve months. It is the desire of every business entity to be around for a longer time. Ethical business practice is the way to go if you and your business truly value going concern.

Sustainability
Without sustainability, investments in business will simply not yield fruit. And without running your business on sound ethical values, sustainability will not be achieved in businesses and investments.

Competitive edge
Quality save money is a popular belief in accounting, business and investment. You will save the cost of reworking defects borne out of using poor equipment and employment of sharp practices. Again, this will give you and you investment (business) easy access to the heart of the general public if you build your business on ethical values and principles.

Like Zig Ziglar would always say, "you will get all that you want in life if you can simply help enough others get what they want." He called this the „golden rule philosophy.‟ And it is indeed a golden rule philosophy. This philosophy is not only applicable in general life interactions. In fact, it is truer in the world of business.

Your customers and other stakeholders in the business community will naturally come to love and appreciate your company and the product you have to offer if they discover that you uphold business ethics in your business operation. Good business ethics will definitely reflect on the quality of your products, because you have the satisfaction of your customers at hand while you were producing your products. Uphold good and sound business ethics in your business operation and watch your business soar!

Conclusion
As Indian companies compete globally for access to capital markets, many are  finding that the ability to benchmark against world-class organizations is essential.  For a long time, India was a managed, protected economy with the corporate sector  operating in an insular fashion. But as restrictions have eased, Indian corporations  are emerging on the world stage and discovering that the old ways of doing business  are no longer sufficient in such a fast-paced global environment. Declaration
I Debesh Pattnaik, a student of BBA.LLB (HONS) Siksha 'O' Anusandhan National Institute of Law, Bhubaneswar does here by declare that the Research Paper titled Corporate governance and business ethics is done by me.

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