Ethical Standards in Corporate Governance

Ethical Standards in Corporate Governance

Corporate Governance

Governance means to run the rules, policies and procedures of an organization with the authority. Corporate governance can be defined as “a system or manners in which corporate affairs and other business activities are directed and managed by their senior Management and Board of Directors”. Cadbury Committee also defined the corporate governance as “a system by which corporations are directed and controlled” (OECD).

Corporate governance on one side clearly defines the responsibilities of the Directors and the Managers to run corporate affairs, on the other side it is also concerned with the Accountability of those Directors and Managers. The whole of corporate governance lies in broader concepts like Ethics, Responsibilities, Transparency, Accountability, Fairness and disclosure.

Ethical Standards

Ethics can be defined as “the norms or standards of behaviors that guide moral choices about our behavior and our relationship with other” .The important thing in ethical standards in that “The Recognition of ethics as a standard across the globe is a problem and there is no single approach to ethics”.

In this essay it is tried to elaborate and explore the ethical codes, principles, rules, regulation, processes, procedures and standards which are being practiced in differentcorporations of different countries also from different religious perspectives and about their limitations. The question or hypothesis of this essay will be that either ethical standard are being followed in corporate governance system or not? Secondly what are the impacts or consequences or results of ethical standards in governing corporations?

There are two types of mechanisms which are legal and ethical compliance mechanism. The legal compliance mechanism as related to law so in earlier studies it is proven as inadequate because it does not support corporations morally and lack of ability to build their trust. Freedom of excellence and Freedom of indifference both concepts explain that legal mechanism is not sufficient to deal with the fraudulent practices and issues which inspired the ethical behaviors and mechanism in the corporations. Ethical mechanism is considered or addressed from a virtue ethics perspective. Depending upon the core values and principles of ethical standards in corporations the focus of the virtue of governance is to establish series of real responses. Some of the corporations grown dramatically which follow the ethics in their corporate affairs and on the other hand some failures were due to fraudulent accounting practices and illegal activities in actual corporate governance(Anderson and Orsagh, 2004)

Legal Compliance Mechanisms

Many US companies adopted legal compliance mechanism which addresses ethics in formal documents (Weaver at el 1999) but much of these activities are just attributed to the 1991 US Sentencing Commission’s Guidelines that describe more easy sentences and fines to the companies that have taken steps to prevent employee misconduct (Metzger at el,

1994 and Paine, 1994). The core issues in corporate governance at fundamental level from an ethical dimension are building relationship and trust in both (within and outside the organization).

Badaracco and Webb, (1995) showed several distributing patterns which were based on in-depth interviews at Harvard with 30 graduates of MBA program, Firstly young managers received guidelines from their boss or felt strong pressure from the organization to do things that they believe are unethical, some illegal or sleazy. Secondly legal compliance mechanism helped very little in this environment. Thirdly many of the young managers concluded that executives of their company were unaware about ethical issues or they were avoiding their responsibilities or they were so much busy. Finally not focusing on the company loyalty or corporate codes, the young managers resolve the problem that they largely faced on the basis of individual values and personal reflection.

Ethical Compliance Mechanisms

There are many factors that have brought ethical issues into the main focus, including technology, rising competition and globalization (Harshbarger and Holden, 2004).

Trevino at el (1999) study suggested that certain characteristics of legal compliance are of less importance than the broader perceptions of ethical values. They argued that consistency helped the most between the actions, policies and ethical climates of the organization including fair treatment to employees, ethically based leadership and open discussion of ethics. They also found that self-interest and un-questioning obedience to authority and thinking that legal compliance mechanisms are made only for the protection of executivesfrom blame. Byrne (2002) found that by adopting the abuses of recent times, top management is learning that fairness, trust and integrity are more important and crucial to the line managers in any organization.

Hansen (2004) pointed out that the core concept of the current study in corporate governance is the problem that whether the corporation’s managers prefer the stakeholder’s interest or shareholder’s interest.

From legal system point of view, Singapore, India and Australia are law jurisdiction and their legal foundations and principles are based on English system, the legal system inChina has been largely developed by following the company law and ethics of the corporate governance and China has made a tremendous progress over last 20 years. India has poor and week structure and system of ethical corporate governance and corporate insolvency (Goswami, 2000, pp. 19-23)

Here two different impotent models are considered that depending upon the nature and purpose of the firm. One is model based on social responsibility and the other is based on shareholder’s value maximization. Ambrosia and Toth (1998) used a natural ethical framework to prove that ethical compliance mechanism is more coherent than legal compliance mechanism because it gives primacy to ethical standards and natural ethical perspectives over law, politics and economics. Natural law ethical theory tells us the moral dimensions of human action, which provide a guide to those who are directly for corporate governance, to forecast that the actions of the particular corporations are according to the legal obligations and finally provides the moral practices to the corporate governance.

There are four virtues that are necessary for ethical decision making agent including justice, self-mastery, prudence and courage. These four virtues or ethical virtues coordinate all human activities and lead them to the good of person and fulfillment of corporations.

Justice (which means fairness) describes a habit or situation in which a person continuously gives what they deserve, exercise their rights and fulfill their duties mean while also tries to watch what others do in same case. By justice we mean to give respect to other person’s privacy which they need to protect from outsider public of the organization.

Self-mastery (which means discipline or temperance) describes the ability to have control in our anger, complacency, laziness and reluctance to complete our responsibility. It is also known as the virtue of moderating feelings of the happiness. It’s also important for the business corporations.

Prudence (which means good judgment, wisdom, practical reasoning and competence) is establishment of good corporate goals and selecting most efficient and effective ways to achieve them. The imprudent person may see goals but cannot consistently find a good mean to achieve them. False-prudence is a notion which guides people to search only that is use full for them.

Courage (which referred as fortitude) is the habit of controlling the feelings of boldness and fear to achieve goals. It’s the ability to face and bear difficult situation either they are afraid and how to overcome these conditions. In corporations courage may be needed to continue difficult rightsizing or downsizing, in spite of risk involved how to take actions in worthwhile projects, keep standing for the rights of other.

The conclusion of only above discussion is that, the real threat for the future to the every corporation is failure in corporate governance. By adopting the set of principles and best practices regarding ethical standards the effective corporate governance can be achieved. If your corporations have reputation in today’s marketplace for the ethical behavior then you can attain customer loyalty as well as your employee’s loyalty. To follow the ethical standards in corporate governance is also a competitive advantage for the firm or organization. Companies should adopt the environmental protection policies and ethical training programs to develop and build trust on society and to develop positive corporate image and reputation. So ethics is really an important part for success of business and it will continue as a key to success in the 21st century.

Business Horizons (2013) argued that if unethical and illegal activities in the corporations are to be minimized then following three elements must be practiced within the business. (1) Presence of set of core ethical values infused throughout the organization in its practices, processes and policies. (2) Presence of ethical leadership on continuous bases. (3)Formal ethics program establishment, including ethics training, an ethics officer, ethics hotline and a code of ethics. The core issue that Board of Directors, senior executives and the managers face is unethical corporate activities, it also have very negative impact and very difficult to overcome this problem.

U.S. Sentencing Commission (2010) determined the range of unethical and illegal activities extensively taking place in the corporations, including favoritism, extortions, money laundering, nepotism, bribery, kickbacks, corruption, giving and receiving gifts (hiba) and entertainment, fraud, conflicts of interests, discrimination, aggressive accounting, sexual

harassment, environmental pollution, workplace safety, use of intermediary and improper use of corporate inside information. This list does not have legal but even unethical practices by the corporations and their agents, including promising breaking, disrespect, dishonesty and disloyalty causes problems to the stakeholders. How the corporations can prevent from these unethical and illegal behaviors by giving necessary training to the employees and managers is the main challenge of today’s ethical dilemma and different theories have been presented in this context. Brass, Butterfield and Skaggs (1998) argued that to minimized unethical and illegal activities ethical corporate culture must necessarily present in the organization. It not only helps to avoid the unethical corporate scandals but also leads towards good ethical behavior in all levels in the corporation.

Ethics Resource Centre (2010) conducted a survey about corporate ethics from 2,852 U.S employees. The results depicted that organizational culture plays key role ethical decision making (Mcdonald 2009).

What critical elements are necessary to develop ethical corporate culture, is the main question that arises. In the answer three elements are identified including, (1) the continuous presence of ethical leadership (2) a set of core ethical values followed throughout the organization in its practices, policies and process (3) a formal ethics program including ethics training and ethics hotline etc. So these three are the pillars of an ethical corporate governance.

Schwatrz (2005) suggested a following proposed list of universal ethical values for all the businesses.

Respect includes respect for all human rights. Fairness includes equity and impartiality. Responsibility includes accepting faults, not blaming others and accountability. Citizenship includes helping the community, protecting the environment and

obeying the laws. Trustworthiness includes loyalty, integrity, reliability, promise keeping,

transparency and honesty. Caring includes unnecessary harm avoiding and sensitivity towards others.

Interaction of all the three elements or pillars is very important or necessary to develop and sustain an ethical corporate culture within the corporation. The assumption is that once an ethical culture is developed then the degree of corruption, crimes and unethical behavior will be automatically minimized.

The following model explains the strong relationship between these three corporate pillars

Key elements of an ethical corporate culture

It is concluded that due to human nature the crimes, corruption and other factors regardless of whatever efforts to be undertaken the unethical and illegal activities can never be completely removed or eliminated from the workplace.

Islamic Perspective or Islamic codes of corporate governance

Regarding the Islamic principles of corporate governance there is growing trend in this profile. Islam provides honesty, protection, fairness and justice to all the parties and ensurestheir rights and dues. Critical principles of accounting 20(2009) attempted to discussed theapplications, natures and comparison of Islamic principles of corporate governance(IPCG)with the conventional principles of corporate governance keeping in view the reference of Organization of Economic Corporation and Development(OECD).

Since the mid of 1980s the corporate governance debate has greatly evolved and attracted the great deal of communities as the shareholders, regulatory agencies, managers and investors also in academic research (Abu-Tapanjeh, 2006). The corporate governance is main principle of successfully running firms as well as provides guarantee and confidence by monitoring and controlling the operations of the firm. Corporate governance need to become Islamic principle based instead of being based on rules, regulations (OECD, 2004). Although Islamic economy is performing same functions as like conventional economy but there is always a unique difference between the implementation of both principles. In real, the primary characteristic of Islamic economy is to provide just, fair, honest and balanced economy or society according to Islamic ethical rules and values. (Ahmad, 2000; Mirakhor, 2000; Warde, 2000) prescribed that Islamic business is always functioned by ethical norms, values and social commitments, based on ethical and moral frame work of shariah. Khalifa (2003) also explained the Islamic economics as it is Godly, humanly, ethical, moderate and balanced. Darman (2005) described that it has become critical to worldwide efforts equate and strengthen capital market and to protect investors.

Ethical corporate

culture

Ethical leadership

Ethical programs Core ethical values

Daniel (2003) described some reasons that why we care about ethics in corporate governance, firstly it increases economic growth and efficiency, and enhance foreign direct investment (FDI), secondly it decreases the corporate crises risks, thirdly it is very important for legitimacy or market economy, hence fourth reason is that it ensures the consideration of standards and main principles of corporate governance.

Islam relates to all fields of life including how to run the business, trade and commerce. Shariah nor only covers our religious rituals but also covers our routine life, economics, politics, banking, business and social issues (Wikipedia, 2005). Muslims are directed to do businesses according to shariah rules, including being fair, honest and just too all others. Saeed (1996) explained that real virtue is riba prohibition in Islamic codes.

In Islamic system sole power belongs to Allah (S.W.T), the Almighty and we as human are only vice regent of it. We as Muslims are directed to do our businesses as instructed by shariah codes and principles. Muslims are directed to possess high moral and ethical conduct, so not to deceive, exploit or betray his/her fellow beings. The Holy Quran (6.132): ‘to all the degrees (or ranks) are according to their deeds’. Islam encourages the participants to work collectively frankly, freely to reach at a decision (Shaiekh 1998). Hence OECD principles in this situation have been successfully imposed and thought an excellent tool of corporate governance as compare to Islamic codes of corporate governance.

Codes of ethics and employee satisfaction

A good business or good corporate governance is the result of good ethics (Koonmee et al. 2009). Marketing firms which are socially responsible act with realization that their actionsaffect the numerous stakeholders, including employees, customers and society at large (Madden-Hallet, 2009). Many firms are trying to impose ethical standards by establishing the formal ethical codes, values statement, credos, and/or codes of conduct (Ki et al. 2012). Ethical codes play a vital role in building corporate governance, if firm is effective in its ethics then the firm will progress and firm can better response to outside demand and pressure from stakeholder (Raiborn and payne, 1990; Wotruba et al. 2001).

Ethical codes mostly encourage the corporate philanthropy activities (Wood 1991; Sharma et al. 2011). CP activities depict the corporate social responsibilities (CSR). CP activities also increase competitive benefits and employee morale (Porter and Kramer, 2002) and commitment (Collier and Esteben, 2007). Ethics-based corporations can be profitable. High level ethical standards are always encouraged by developing principles and codes of ethics in a corporate endorsement. Sims (1991) pointed out that such ethical codes are helpful in developing public trust, CEO’s commitment, stress managerial professionalism and encourage employees to obey the laws, principles which are established against employee misconduct and to protect stakeholders.

Ethical work climate for in service employees

Figure: Theoretical Framework

Valentine and Fleishman (2007) pointed out that the development of ethical programs facilitates the ethical corporate obligations to society in broader sense. Corporations must develop and enforce the ethical standards, rules and guidelines to make very clear to all employees about theirs tasks, duties and proper actions. Managerial implications indicatethat ethical firms gain higher productivity and greater employee retention (Sharma et al. 2011).

Disclosure of ethical codes on corporate websites

Before the US WorldCom scandal and catastrophe, the corporate ethics was not a major topic of concern. The effects of unethical decision making resulted more desire for transparency and increase in ethical conduct. A comparison of top 100 US-based corporations and top 100 internationally-based corporations is done from the 2001 Fortune Global 500. In first two observation dates there was no significant difference between the number of US-based and internationally based corporations, but on March 2003 observation date depicted the significant difference that coincided with Sarbanes-Oxley Act implementation date.

From 1987 to 2003 more than 100 studies described the different aspects of codes of ethics including Frequency in fortune 500 firms (Ruhnka & Boestler, 1998) Foundations (Schawrtz, 2002; Backof & Martin, 1991), Contents (Gaumnitz & Lere, 2002), effectiveness (Schawrtz, 2001), difference of cultures (Giacobbe & Segal, 2000) and professions differences (Valentine & Barnett, 2002; Bollom, 1988). Campos (2002) studied on the base of security & exchange commission and result in growing openness of the corporations to disclose their ethical codes, conducts and principles by making them sure “readily available” to stakeholders on their websites starting after demise of Enron & Arthur Anderson though july of 2003.

Marnburg (2000) suggests that ethical standards or codes of corporations serve to maintain an environment that increase positive behavior or challenge individuals to ethical behavior. It indicates that “tone at the top” formed by the management of the corporation is very important for corporate ethical behavior. Ruhnka & Boerstler (1998, p. 322) give evidence that government rules and regulations can influence the codes of ethics. These writers examined the process of updating the codes of ethics of Fortune 500 service companies and industries from 1960 to 1994. This study indicates that the corporations should place their codes of ethics on the websites for openness to the public scrutiny. The analysis shows

Knowledge of ethical norms, values,

expectations and CSR

Healthier and stronger orientation towards corporation among

employees

Employee retention increased

prominent difference between the willingness of US-based and Internationally-based firms in respect their codes of ethics on web to the public guide and scrutiny. This research also results and examined the level of making ethical codes “readily available” for the public awareness.

Relationship between ethical standards and the firm practices

Codes of ethics that are trying to control and monitor corporate moral behavior are becoming considerably important. Fundamental objective of today’s corporate governance is to increase and boost up ethical decision making. The implementation and establishment of ethical standards not only foster (encourage) the trust with trade partners but alsocultivate the foreign direct investment (FDI). Multinational companies always seek for new global market to compete, manufacture and sell their products or services, but it becomes very complex for a number of managers that how to manage the ethical differences from different backgrounds and cultures (Huste, 1999; Roberston, Crittenden, Brady, & Hoffman, 2002). In general globalization has forced managers to confront ethical beliefs and perceptions that are not consistent with their own moral codes (Velazquez, 2000).

A moral difference of ethical ideologies and the firm practices in US and Russia isexamined. This study divided the employees into two powerful groups (economies). Firstly, US managers were predicted to be more interested in financial results as compared to Russian. So the supposed results indicated that American is more concerned with the financial returns and they are ready to sacrifice their ethics and moral codes when compared with ethics/profit tradeoff. Russian managers were found to be more relativistic than American managers, which indicates that Russian have strong belief in their situational ethics.

A corporate model of sustainable business practices, an ethical perspective

A corporate model for sustainable business practices requires the broader sense contribution of stakeholder values (Waddock, Bodwell & Graves, 2002). Our planet Earth should be to provide support ongoing and future corporate practices, if it is thought to be genuinely stable from both economic and ecological perspective. There is no one solution to this problem, but several aspects can contribute to make model and conditions. From last twenty years the terms such as corporate governance, sustainability, corporate social responsibility and triple bottom line have all become an important part of daily used vocabulary of the organizations. The following model is divided into five different but interrelated elementsincluding (1) foundation (2) communication (3) Guidance (4) Outcome (5) Reconnection

Figure: A Corporate model

This is a continuous model because it mutually depending on each other. It is suggested that the process of thisstarted from the element ‘foundation’ to develop, business practices in society and marketplace.the ongoing and further coming reconnections between elements.

The ethical issues in corporations havedevelopment. Ethical values, norms and behavior of a corporate leaders (Walumbarwa & Schaubroeck, 2009). is the, ‘description normatively good conduct personal actions, and promotion of followers through reinforcement, two way communication and decision-making (Brown et al. 2005).

This essay will be concluded from the Islamic perspectivescorporations and all other activities of lifeplaces great importance on ethical prinorms, values and moral codes are very comprehensive and numerous verses of the Holy Quran and Sunnah (Khan, 2009)list of Islamic business ethics t(moderation), Sabr (patience), Infaq (spending to meet social obligation), Amanah (honesty), Istislah (public interest), and separate from these the negative values to be avoided are Zulm (tyranny), Israf (extravagance), Hirs (greed), anwealth).

A Corporate model of sustainable business practices, an ethical perspective

This is a continuous model because it consists of series of continuous elements that are on each other. It is suggested that the process of this

the element ‘foundation’ to develop, monitor and manage the sustainable in society and marketplace. This is an interactive model which describes

ng and further coming reconnections between elements.

issues in corporations have developed at the same time of ethical leadership Ethical values, norms and behavior of a corporate are directed by the ethical

Schaubroeck, 2009). According to Brown et al, Ethical leadership is the, ‘description normatively good conduct through interpersonal decision

, and promotion of followers through reinforcement, two way making (Brown et al. 2005).

This essay will be concluded from the Islamic perspectives about the ethical standards in corporations and all other activities of life, as Islam is the dominant religion in worldplaces great importance on ethical principles and values in spheres of human life. norms, values and moral codes are very comprehensive and numerous evident from the

s of the Holy Quran and Sunnah (Khan, 2009). Rahman (1994) described the positive of Islamic business ethics to be practiced are Adl (justice), Ihsan (compassion), Iqtisad

, Sabr (patience), Infaq (spending to meet social obligation), Amanah (honesty), Istislah (public interest), and separate from these the negative values to be

ny), Israf (extravagance), Hirs (greed), and Iktinaz (hoarding of

n ethical perspective

of series of continuous elements that are model can be

monitor and manage the sustainable This is an interactive model which describes

developed at the same time of ethical leadership directed by the ethical

to Brown et al, Ethical leadership through interpersonal decision-making and

, and promotion of followers through reinforcement, two way

about the ethical standards in , as Islam is the dominant religion in world so it

nciples and values in spheres of human life. Ethical evident from the

described the positive Ihsan (compassion), Iqtisad

, Sabr (patience), Infaq (spending to meet social obligation), Amanah (honesty), Istislah (public interest), and separate from these the negative values to be

d Iktinaz (hoarding of

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