Business Ethics and Corporate Governance - Top Differences and Impact in Organisations

Discover the importance of implementing business ethics and corporate governance by gaining insights into their roles, impact on stakeholders, and through fundamental differences. Delve deeper into examining best practices, structural frameworks, and how they shape ethical decision-making, laying the foundation for a sustainable and responsible future.

It's not just about the numbers any more. Today, businesses are at crossroads - prioritising ethics and responsible practices, alongside achieving financial goals. It is essential to explore important concepts, such as business ethics and corporate governance, that pave the way for a sustainable and impactful future. Find out how they differ, get to know their individual and collective impact, and more, by clicking on the links below. 

Table of Contents

1. Difference in Definitions - Business Ethics and Corporate Governance
2. Key Elements of Business Ethics and Corporate Governance | How They Differ
3. Role of Business Ethics in Decision-Making Process
4. Best Practices for Ethical Decision-Making
5. Common Ethical Issues in Business
6. Incorporating Social Responsibility and Fiduciary Responsibilities for Business Ethics
7. Understanding the Structure of Corporate Governance
8. Best Practices for Implementing Corporate Governance
9. Impact of Business Ethics and Corporate Governance on Stakeholders
10. Case Study on Business Ethics and Corporate Governance
11. Leading the Way through Business Ethics and Corporate Governance

Difference in Definitions - Business Ethics and Corporate Governance

Business ethics are moral principles and values that help guide how organisations and their employees conduct business. These guiding principles dictate how a company interacts with its customers, suppliers, competitors, employees, and the broader community. 

Conversely, corporate governance covers systems, policies, and practices that direct and control a company. The purpose is to align stakeholders' interests, covering those of shareholders, all levels of management, creditors, customers, and society at large.

Key Elements of Business Ethics and Corporate Governance | How They Differ

Business ethics elements

Several key elements contribute to the foundation of the ethical framework in businesses.

• Integrity everywhere. This is all about acting with honesty, truthfulness, and trustworthiness in all business dealings.
• Transparency in operations and finances. It is important to openly disclose information about the company's operations, financial status, and dealings with stakeholders.
• Accountability for actions taken. Accepting responsibility for the consequences of actions or decisions, and it is a sign of proper management. 
• Fairness to all. Treating all stakeholders equitably and without discrimination.
• Respecting the interests of everyone involved. Acknowledging the rights, dignity, and interests of all individuals and groups affected by the company's activities.

Corporate governance elements

Now, let’s see which are some of the main principles of corporate governance. 

• Transparency: Ensuring open and timely disclosure of material information to stakeholders.
• Accountability: Establishing clear lines of responsibility and holding individuals and the board of directors accountable for their actions.
• Independence: Promoting the independence of the board of directors and audit committee to ensure objective decision-making.
• Fairness: Treating all shareholders equitably and protecting their rights.
• Responsibility: Recognising the company's responsibility to contribute to the well-being of society and the environment.

Since the basic differences between business ethics and corporate governance are done with, let’s review their roles individually and in more detail in an organisation. 

Role of Business Ethics in Decision-Making Process

Ethical decision-making involves setting aside economic factors to emphasise morality beyond the organisation and customer/clients and towards society at large. Ethical choices can be shown through company values by finding suitable alternatives that help the perception of a business. 

Best Practices for Ethical Decision-Making

It is generally harder to observe the impact of ethical decision-making in business, because envisioning that it will be good for customer perception in the long run can be ineffective. 

Experts like Chritine Elgood from Elgood Effective Learning mention tying KPIs (Key Performance Indicators) to ethical decision-making. Here is how. 

1. Return on Capital Employed (ROCE) is an important measurement used to assess how profitable a company is and how capable it is to invest its earnings back into its operations for future growth. It helps understand how efficiently a company uses its capital to generate profits and support future business expansion.
2. When the leader is considered trustworthy by their employees, it creates an environment where the employees feel confident, supported, and valued. This sense of trust in leadership encourages greater involvement, dedication, and commitment from the employees towards their work and the organisation's goals. Maybe brushing up on the core leadership theories now is a good idea!
3. The reputation of a company significantly shapes how consumers make their purchasing decisions.

Common Ethical Issues in Business

Insider trading is heavily debated whether it is unethical or not. It means that individuals with access to non-public information have an unfair advantage over other investors who do not have access to this information. This goes against the principle of fair and equal access to information in financial markets. It can lead to securities mispricing that heavily impacts the market's ability to reflect true value.

From a legal standpoint, insider trading is prohibited because it violates securities laws and regulations designed to ensure fairness, transparency, and equal opportunity for all market participants.

Another common unethical practice is bribery in organisations. This practice is outright unfair and does not consider the social and political consequences that lead to the erosion of trust among employees and customers. 

Incorporating Social Responsibility and Fiduciary Responsibilities for Business Ethics

Social responsibility involves a company's commitment to act ethically and contribute positively to society. It encompasses initiatives that go beyond profit-making goals, focusing on environmental sustainability, supporting communities, and ethical labour practices. 

Likewise, fiduciary responsibilities refer to the obligation of individuals or entities (such as the board of directors, executives, or trustees) to act in the best interests of others, typically those to whom they owe a duty of care. In the context of business ethics, fiduciary responsibilities involve managing finances and resources in terms of providing accurate and transparent financial reporting and prioritising the interests of shareholders or stakeholders while avoiding conflicts of interest. 

Understanding the Structure of Corporate Governance

To understand the structure, it is essential to know the components. 

1. Board of Directors: The board holds a pivotal role in overseeing the company's strategic direction and ensuring alignment with the interests of shareholders. Its composition, diversity, expertise, and independence are vital factors that influence decision-making and governance effectiveness. A well-structured board brings diverse perspectives, robust oversight, and strategic guidance, fostering responsible decision-making and mitigating potential conflicts of interest.
2. Shareholders: Shareholders act as key stakeholders, exerting influence through voting rights. Their active engagement in corporate governance processes, such as voting on major decisions and holding the board accountable, plays a significant role in shaping the company's direction. The alignment of shareholder interests with the company's long-term objectives impacts its governance practices and strategic decisions. See how stakeholder management works in more detail.
3. Management/Executive Team: Effective management translates the board's strategies into operational plans and actions. The executive team's competence, integrity, and commitment to ethical practices directly influence the company's performance, risk management, and adherence to corporate governance standards. Their leadership sets the tone for ethical behaviour throughout the organisation.
4. Committees: Committees within the board structure provide focused attention to critical areas, enhancing governance effectiveness. For instance, the audit committee ensures financial transparency and accuracy, mitigating financial risks, while the compensation committee promotes fair remuneration practices and aligns executive incentives with company goals. These specialised committees contribute to robust oversight and accountability.
5. Corporate Policies and Procedures: Establishing and adhering to clear and ethical policies and procedures is fundamental to sound corporate governance. These guidelines set expectations for ethical behaviour, risk management, compliance, and accountability, fostering a culture of integrity and responsible decision-making across the organisation.
6. External Auditors: Independent auditors offer an objective assessment of financial statements, bolstering transparency and credibility. Their scrutiny helps identify financial irregularities, enhancing investor confidence and trust in the company's financial reporting accuracy.
7. Regulatory Bodies and Compliance: Compliance with regulations and industry standards is imperative for maintaining legal and ethical standards. Adherence to these standards ensures that the company operates within legal boundaries, mitigating legal risks and reputational damage.

Best Practices for Implementing Corporate Governance

1. Governance Frameworks: Create effective structures ensuring transparent roles, stakeholder accountability, and sustainable practices.
2. Compliant Policies: Align policies with laws, goals, and culture for streamlined decision-making and legal adherence.
3. Improved Board Reporting: Enhance report quality for informed decisions, addressing issues like complexity and clear objectives.

Impact of Business Ethics and Corporate Governance on Stakeholders

Strong business ethics and effective corporate governance practices positively impact various stakeholders. Let’s see how.

• Shareholders: Increased confidence in the company's management and operations, leading to enhanced shareholder value.
• Customers:Trust in the company's products or services, resulting in customer loyalty and repeat business.
• Employees: A positive and ethical work environment that attracts and retains talented individuals, fostering employee engagement and productivity.
• Suppliers and Business Partners: A reputation for ethical dealings attracts reliable suppliers and business partners, strengthening the company's supply chain.
• Society: A positive contribution to the community and the environment, enhancing the company's reputation and social licence to operate.

Case Study on Business Ethics and Corporate Governance

Wells Fargo Account Fraud: Governance issues and ethical implications

The 2016 scandal involving fake accounts at Wells Fargo profoundly impacted the banking sector, damaging its image regarding ethical conduct and customer service standards.

So, top management put employees under pressure to meet sales targets. They created millions of fake accounts without customer consent. When investigations took place from regulatory agencies, they resulted in massive fines and settlements amounting to billions of dollars. Top executives had to resign.

What we can learn here is that, organisations should place importance of ethics over profits. Not only that, but also have robust internal controls, transparency, stakeholder protection, along with leadership responsibility. 

Leading the Way through Business Ethics and Corporate Governance

As you can see, business ethics and corporate governance go hand-in-hand. If you are considering learning more about them together, the courses below should help you. 

• Fundamentals of Ethics Corporate Governance and Business Law on CIMA
• Corporate Governance from IIM
• Intro to Managing Ethics in the Workplace & Marketplace on Coursera