Corporate Governance and business ethics

ABSTRACT
Prof.Vijay singh Panwar ( Professor) Department of Business Administration ( Janardhan
rai nagar rajasthan vidhyapeeth university) ,Udaipur (Rajasthan)
Ms.Priyanka Pagaria (Lecturer ) Advent institute of management studies ,Udaipur
(Rajasthan)

Business ethics and corporate governance have become key factors influencing investment
decisions and determining the flows of capital worldwide. In part, this is the result of recent
scandals in both developed and developing countries. However, in a more positive sense, the
growing demand for good governance also flows from the lessons learned about how to generate
rapid economic growth through market institutions. From this perspective, the emphasis on anti-
corruption and good governance is based both in moral standards as well utilitarian
considerations of improved market performance. While ethics and an ethical business culture are
at the heart of the corporate governance framework, the two are approached somewhat
differently. Corporate governance is concerned mainly with creating the structure of decision-
making at the level of the board of directors and implementing those decisions. In this sense
governance can be thought of as steering the corporation. In fact, the very word governance itself
comes from the Greek word for steering. Moreover, corporate governance is about
accomplishing the core values of transparency, responsibility, fairness, and accountability.
Because these values are also key concerns for business ethics, the two can be seen as being
directly related. However, the corporate governance aspect deals with setting up the structures
through which these values are attained, while ethics is both a guide for behavior and a set of
principles (or a moral code). While a good ethics system includes the core values of
responsibility, transparency, fairness, and accountability, it goes into many other dimensions as
well.
Corporate governance has become an essential tool for improving corporate performance and
advancing the development of market-oriented democracies. Good governance practices maintain the
integrity of business transactions and in so doing strengthen the rule of law and democratic
governance. A powerful antidote to corruption, corporate governance clarifies private rights and
public interests, preventing abuses of both. Corporate Governance is the system by which
companies are directed and controlled. fundamental objective of corporate governance is the
‘enhancement of the long-term shareholder value while at the same time protecting the interests
of other stakeholders. Corporate governance can be defined as a system of structures, processes,
and activities used to monitor, direct, and control a company or organization. Governance issues
are relevant for public companies, family and closely controlled enterprises, government
ministries and nonprofit organizations. Governance includes such areas as interactions between
senior management, boards of directors, shareholders rights, and other corporate and community
stakeholder’s needs and interests. In today’s dynamic and fast changing global business
environment there is a call for more formal and transparent governance. Senior management and
boards are under greater ethical scrutiny and are being held accountable for results. Thus
accessing, revising, and improving governance practices front of virtually all organizations. This
paper concentrates on cutting-edge techniques, strategies, and action plans for improving board
design, maximizing individual contributions to company boards, and improving corporate
governance.

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 business organizations as a whole. Applied ethics is a field of ethics that deals
with ethical questions in many fields such as medical, technical, legal and business ethics.
Business ethics can be both a normative and a descriptive discipline. As a corporate practice and
a career specialization, the field is primarily normative. In academia descriptive approaches are
also taken. The range and quantity of business ethical issues reflects the degree to which business
is perceived to be at odds with non-economic social values. Historically, interest in business
ethics accelerated dramatically during the 1980s and 1990s, both within major corporations and
within academia. For example, today most major corporate websites lay emphasis on
commitment to promoting non-economic social values under a variety of headings (e.g. ethics
codes, social responsibility charters). In some cases, corporations have redefined their core
values in the light of business ethical considerations

Essential of Corporate Governance?

The modern business corporation is one of the world’s most powerful means for creating wealth and
prosperity. Corporations were invented for the benefit of society, but to fulfill that role and serve
society, they must be well governed. They must have responsible internal leadership and operate
within competitive markets under sound public governance.
Corporate governance infuses the democratic values of fairness, accountability, responsibility, and
transparency into corporations. It maintains the integrity of business transactions and in so doing
strengthens the rule of law and democratic governance. A powerful antidote to corruption, corporate
governance clarifies private rights and public interests, preventing abuses of both.
At its core, corporate governance structures the relationships among investors, boards of directors,
managers, and other stakeholders. Its goal is to maximize long-term shareholder value by improving
corporate decision-making and performance. This involves establishing incentives and procedures
that serve the interests of shareholders while respecting the interests of other stakeholders in the
corporation.
As developing countries begin to compete in global markets and translate their growth into more
mature, sustainable economies, they must put in place rules and principles that stabilize markets and
support entrepreneurial innovation. Corporate governance has become a major issue in development,
since it relates directly to the establishment of long-term productivity and sustained growth. The
future of emerging markets depends on improving governance within and around corporations.

Who Benefits from Corporate Governance?

A well-run corporation generates value for investors and lenders as well as for its employees,
customers, and society as a whole. Good corporate governance contributes to a healthy business
climate that encourages domestic and foreign investment, in turn creating jobs and increasing the
welfare of a country’s citizens.

Companies
Well-governed companies perform better. Companies that institute good governance practices expect
to lower their cost of capital and can attract a wider range of investors, many with a longer-term view
of investments. Their management can be expected to improve in areas such as setting company
strategy, ensuring that mergers and acquisitions are undertaken for sound business reasons, and
matching compensation systems to performance. Of crucial importance is a company’s ability to
reduce its exposure to various risks, including its exposure to legal action. By acting responsibly and
fairly, a company can also build fruitful, long-term relationships with its stakeholders, including
creditors, employees, customers, suppliers, and local communities.

Investors/shareholders
Investors recognize the potential for higher returns from well-run companies and are willing to pay a
premium for these returns. They also value the certainty that they will not lose their investment due
to greedy, careless, and unaccountable managers or cronies. Good governance protects the rights of
investors, especially minority investors, including their rights to have a say in company management
and major transactions and the right to be informed about their investment. By building efficiency
and trust in capital markets, it provides investors with greater liquidity, so they can diversify and sell
their assets when they need to. Finally, procedures for dealing with business failures protect creditors
and limit the liability of shareholders.

Stakeholders and society

Good governance calls upon companies to respect their obligations to employees, customers,
creditors, suppliers, and communities. These groups benefit from honesty, quality, and reliability in
their dealings with companies. Society as a whole reaps the benefits of well-run corporations as they
create jobs, build confidence in the economy, and prevent waste.
The Institutional Framework for Governance
In order to maintain a healthy, competitive governance environment in emerging markets, certain
institutional prerequisites of a market economy must be put in place. Advocates for good corporate
governance should highlight the need for the following institutional reforms:

Property rights and contract law

A strong system of private property rights must clearly define who owns what and how property may
be exchanged. Owners should be protected from expropriation without due process. Laws should
establish the legal identity of corporations and allow the establishment of joint stock companies with
limited liability of owners. Laws must also guarantee the sanctity of contracts.

Independent judicial system and rule of law

A strong, independent, and transparent judicial system is key to enforcing rules and resolving
conflicts. Courts should resolve disputes consistently, fairly, and swiftly. The rule of law requires
that the government serves the public interest and not just private interests. Citizens must have equal
protection under the law and government must not be above the law.

Freedom of entry

Markets should be competitive and open to new entrants. Barriers to entry should be removed,
including administrative barriers and official monopolies. Anti-trust laws should be enacted and
enforced. Preferential treatment in the form of subsidies, quotas, and tax breaks should be eliminated.

Board of directors

Directors have two overarching duties. The duty of care requires directors to be informed, act with
reasonable care, and monitor company risks. The duty of loyalty requires that directors act in the
interests of the company and all its shareholders, and avoid conflicts of interest.
The board of directors selects the company’s executive leadership, monitors the executive’s
performance, and compensates the executive in line with performance. The board holds the executive
accountable, and in turn the board is held accountable to shareholders. Other key roles include
oversight of company strategy, ensuring compliance with laws, and supervising the audit of financial
statements.

Freedom of information

Governments should be transparent about their policies and should not restrict the flow of economic
information. Businesses, the media, civil society organizations, and citizens should be able to express
their opinions and share information freely.
Significance of Business Ethics in Business
Profit Maximization
The importance of ethics in business can be understood by the fact that ethical businesses tend to make
much more profits than the others. The reason for this is that customers of businesses which follow ethics
are loyal and satisfied with the services and product offerings of such businesses. Let us take an example.
Suppose, there is an organization named XYZ which manufactures cosmetics. XYZ greatly believes in
the importance of business ethics. When XYZ advertises its cosmetics in the market, being an ethical
organization, it will be very truthful and honest in its communication with the probable customers. It will
tell correctly about the kind of ingredients it has used while manufacturing the cosmetics. It will not lie or
exaggerate about the benefits or uses of its products either. So the customers who buy its cosmetics, know
precisely what they are buying and how useful that product is going to be for them. This way, the product
will meet their expectations and thus, satisfy the customers. When customers are satisfied, they will
become loyal to the company and come back again for re-purchasing. This will surely increase the profits
of the organization. Thus, the importance of business ethics is that it creates loyalty in customers and
maximizes the profits

Efficient Utilization of Business Resources

In an organization, people working at the junior levels often emulate the ones working at the top. The
same applies with ethics too. If the management or seniors of an organization follow ethical business
practices, i.e, they do not bribe to get their way or they do not cheat the customers, investors, suppliers,
etc., the employees will follow suit. The employees too will refrain from using the office property or
resources for personal benefits. This will result in better and efficient utilization of the business resources.

Creates Goodwill in the Market

An organization, which is well known for its ethical practices, creates a goodwill for itself in the market.
Investors or venture capitalists are more willing to put their money in the businesses which they can trust.
Shareholders too, remain satisfied with the practices of an ethical businesses. Thus, the importance of
business ethics in creating goodwill and building long term relationships, can not be denied. Also, an
ethical business puts greater value on its employees and thus, employees remain loyal to such an
organization too.