BUSINESS STUDIES (CLASS 11) WORKSHEET 20-BUSINESS ETHICS AND CORPORATE GOVERNANCE

BUSINESS ETHICS AND CORPORATE GOVERNANCE

Business ethics is considered as heart of corporate governance. Business ethics is nothing but a process for integrating values such as honesty, trust, transparency and fairness into its policies, practices and decision making. It is essential and vital component of corporate governance.

The term ‘ethics’ defines the standards that bear on right and wrong issues of society. Business ethics is thus a set of professional standards, which emphasis on  principles of honesty and duty to the business and the general public.

The other significant principles included in business ethics are:
Fairness
Integrity
Commitment to agreements
Broad-mindedness
Considerateness
Importance given to human esteem and self-respect
Responsible citizenship
Attempt to excel
Accountability

These principles, if strictly pursued, lead to a decent business environment and create healthy relationships in the organization. However, deviations from these principles can occur due to the following factors:
Ignorance and indifference to issues
Selfishness
Imperfect reasoning

ELEMENTS OF BUSINESS ETHICS

1. Top management commitment – The CEO and higher level managers must be committed to ethical norms of behaviour. This would set an example for all employers and encourage them to follow ethical practice.

2. Publication of code – Code of ethics is a formal written document of the principles, values and standards that guide a firms actions. It may cover areas like honesty, quality, safety, health care etc.

3. Establishment of compliance mechanism: A suitable mechanism should be developed to comply with the ethical standards of the enterprise. The mechanism should be properly communicated to all in the organization.

4. Employee involvement: It is the employees of the lower levels who implement ethical principal so they must be involved in the process of developing ethical code.

5. Measuring results: Although it is difficult to measure the ethical results but it must be verified and audited that have for work is being carried according to ethical standards.

CORPORATE GOVERNANANCE

Management Guru Peter Drucker was absolutely correct in saying "what gets measured gets managed". In the same vein, modern day managements are realizing that ‘what gets acknowledged and valued may get done better’ – hence the focus on benchmarking corporate practices against the best and how to improve.

What is good corporate governance?

Good corporate governance means that your mechanisms, processes and procedures are effective and roles within the organisation are clearly defined. The board takes collective responsibility for the company’s long-term success and it goes about its business with the characteristics of good governance – accountability, transparency, fairness and responsibility.

Who is responsible for measuring governance effectiveness?

The board should take responsibility for measuring governance effectiveness, leading by example in the business by its participation in the process. The shareholders will hold them to account in meeting the strategic vision with their action plan.

The Organisation for Economic Co-operation and Development, abbreviated as OECD

The main areas of the OECD Principles (Setting bench marks for corporate governanace)

I. Ensuring the basis for an effective corporate governance framework
The corporate governance framework should promote transparent and efficient markets, be consistent with the rule of law and clearly articulate the division of responsibilities among different supervisory, regulatory and enforcement authorities.
II. The rights of shareholders and key ownership functions
The corporate governance framework should protect and facilitate the exercise of shareholders’ rights.
III. The equitable treatment of shareholders

The corporate governance framework should ensure the equitable treatment of all shareholders, including minority and foreign shareholders. All shareholders should have the opportunity to obtain effective redress for violation of their rights. 

IV. The role of stakeholders in corporate governance

The corporate governance framework should recognise the rights of stakeholders established by law or through mutual agreements and encourage active co-operation between corporations and stakeholders in creating wealth, jobs, and the sustainability of financially sound enterprises. 

V. Disclosure and transparency
The corporate governance framework should ensure that timely and accurate disclosure is made on all material matters regarding the corporation, including the financial situation, performance, ownership, and governance of the company.
VI. The responsibilities of the board

The corporate governance framework should ensure the strategic guidance of the company, the effective monitoring of management by the board, and the board’s accountability to the company and the shareholders.