Ethics and Corporate Governance - Corporate Governance and Business Ethics

Since corporate governance revolves around the power and control exercised over, but also by corporations, it inevitably entails an ethical dimension. Corporations can be governed, both externally and internally, in ways that impinge on the interests of those who are affected by the corporation in either a beneficial or detrimental manner. Consequently, the governance of corporations can be assessed in ethical evaluative categories such as fair or unfair, responsible or irresponsible, and ethical or unethical. The fact that ethics is not always being dealt with in an explicit manner in corporate law or in corporate governance codes does not in any way diminish the fact that there always is an ethical dimension to corporate governance.

The ethical dimension of corporate governance can be manifested on two levels. The first and primary level that is either implicit or explicit in all corporate governance regimes is the basic ethical orientation of corporate governance regimes. This ethical orientation of corporate governance regimes or codes is called the ethics of corporate governance (Rossouw 2005). The other level on which ethics manifests in corporate governance regimes deals with how corporations are required or recommended to manage their own ethical affairs. This dimension will be referred to as the governance of corporate ethics . These two manifestations of ethics in corporate governance will be discussed next.

Ethics of Corporate Governance

The ethics of corporate governance refers to the ethical values that underpin and guide a corporate governance regime on the regulatory or the enterprise level. If a value system is understood as a set of convictions about what is important and thus what should be given priority then the ethics of governance is an expression of specifically the ethical priorities that inform and guide a corporate governance system. These values that inform and guide a corporate governance system might be articulated openly and explicitly, or they might be invisible and not mentioned at all.

Whether the underlying and guiding values are mentioned explicitly or not does not alter in any way the fact that such a value system exists. In the absence of a clear guiding value set, a corporate governance system will be riddled with internal contradictions and confusing clashes.

In cases where the underlying and guiding values of a corporate governance system are not explicitly articulated, it can be uncovered by probing into the interests and objectives that corporate governance is supposed to serve. The regulations or requirements associated with corporate governance convey a perception of what roles, responsibilities, objectives, and obligations corporations have in a given society. By posing questions like, “In whose interests ought corporations to be run?” or “What are the objectives of a corporate governance system?” the underpinning and guiding values of a corporate governance system can be exposed.

Identifying the ethics of a specific corporate governance regime thus boils down to making explicit the ethical responsibilities and obligations of corporations in society as well as the ethical values associated with these responsibilities and obligations. Even in cases where the value system is explicitly articulated, it makes sense to probe whether the professed value system indeed finds expression in the regulations or requirements of the corporate governance system. It is not uncommon to find contradictions between the professed value system and the value system that is lurking implicitly in the regulations or recommendations of a corporate governance system.

Once the value system of a corporate governance regime has been made explicit, the ethical implications of the identified value system can be evaluated. The objectives and interests that are being prioritized by the corporate governance value system can be assessed for how fair, responsible, or socially benevolent they are. It can also be determined how inclusive or exclusive the interests are that are being served by the corporate governance system. Does the corporate governance system, for example, serve the interests of all stakeholders of corporations or only the interests of specific corporate stakeholders? Are all stakeholders being treated equally or are the interests of some stakeholders merely instrumental to the interests of other stakeholders? What objectives are corporations expected to pursue, and how are the various objectives prioritized? What objective(s) trump(s) the others in the case of a trade-off, or are all objectives that corporations are expected to pursue on equal footing? Responses to these kinds of questions provide the ethics of governance profile of a corporate governance system.

Governance of Corporate Ethics

Corporate governance systems impose upon corporations an obligation or expectation to direct and control various aspects of corporate performance like, for example, accounting practices, risk management, and corporate reporting. At least in some corporate governance regimes, there are also requirements or expectations related to the ethical performance of corporations. Such requirements or expectations can originate from both the external and enterprise level of corporate governance.

On the external corporate governance level, there can, for example, be corporate laws that compel companies to have a code of ethics or to manage and report on their corporate social performance. There might also be less formal expectations of companies issuing from the external level of corporate governance in the form of, for example, communities expecting companies to consult with them on new developments or to contribute towards community development.

On the enterprise level, the governance of corporate ethics focuses on how ethical values and standards are institutionalized in companies. It deals with the systems of direction and control that are implemented within a company to ensure that the company identifies and adheres to ethical values, standards, or rules in its interactions with internal and external stakeholders of the company. The governance of ethics on the enterprise level is likely to manifest in an ethics management or corporate responsibility strategy and programmer. Corporations might govern their ethics for a variety of reasons: they might, for example, be compelled by law to do so; they might do it to conform to the expectations of a voluntary code of corporate governance; they might want to pre-empt prosecution by being able to demonstrate that they have taken measures to ensure that the corporation is run with integrity and responsibility; they might do it because it is considered to be strategically in the best interest of the company; or they might do it because they are convinced that the company has an intrinsic obligation to ensure high standards of corporate ethics.

Shareholder and Stakeholder Models of Corporate Governance

Corporate governance models can be distinguished in terms of whose interests they prioritize in the exercise of corporate control. In this respect two positions can be discerned, viz., shareholder models and stakeholder models of corporate governance.

Shareholder models of corporate governance are premised upon the assumption that corporations should be governed in the best interests of shareholders. According to this model, shareholders are the rightful owners of corporations and consequently corporations should be run to the benefit of their owners. Managers are regarded as agents of owners and are therefore expected to look after the best interests of their principals (shareholders). From this agency perspective, the central focus of corporate governance is on ensuring that corporate managers do not abuse the power entrusted to them for furthering their own or other non-shareholder interests. Instead, the corporate governance system should ensure that the interests of managers are closely aligned with shareholders’ interests. In some jurisdictions boards of directors and managers have a fiduciary duty to act in the best interest of shareholders (Monks and Minow 2004). This exclusive orientation of corporate governance towards shareholder interests is evident in Shleifer and Vishny’s (1997) definition of corporate governance when they describe it as “the ways in which suppliers of finance to corporations assure themselves of getting a return on their investment”.

The shareholder model of corporate governance is clearly reflected in Berle’s (1931) classic articulation of this position when he argued that, Equally famous is Milton Friedman’s defense of the shareholder model of corporate governance in his 1970 article with the title, “The Social Responsibility of Business Is to Increase Its Profits”.

From an ethical perspective, the shareholder model of corporate governance can be assessed in two very different ways. The one ethical assessment is to regard the shareholder model of corporate governance as an ethically constrained model in the sense that it only focuses on the interests of shareholders, while deliberately excluding the interests of other stakeholder groups. This kind of ethical assessment is clearly reflected in Collier and Roberts’s (2001) remark with regard to shareholder models of corporate governance when they state that, “the only ethical imperative at work here is a Friedmanesque dictum to pursue profit maximization”.

An alternative ethical assessment of the ethics of shareholder models of corporate governance argues that the prioritization of shareholder interests is in the best interest not only of shareholders, but also of other stakeholders. It is argued that focusing on the creation of shareholder value provides a rationale for running corporations in a focused and efficient manner that benefits all other stakeholders indirectly. Without such a singular focus, managers will be trapped in a wasteland of conflicting stakeholder claims that will ultimately lower corporate efficiency to the detriment of not only shareholders, but also of all other stakeholders of the corporation (Goodpaster 1993). Only corporations, it is argued, that can sustain efficiency over time can keep on creating value for its shareholders and other akeholders, albeit that at least some stakeholders benefit indirectly from the promotion of the interests of the shareholders.

Stakeholder models of corporate governance are premised upon the assumption that corporate control needs to be exercised in the interest of all legitimate stakeholders. Within stakeholder models companies are not regarded as mere vehicles for creating shareholder value, but as economic institutions that rely on the cooperation and contribution of various stakeholders whose interests should be recognized. The corporation is thus seen a nexus of interconnecting interests that needs to be recognized and reconciled with one another.

In order to make a proper assessment of the ethics of stakeholder models of corporate governance, the distinction drawn by Donaldson and Preston (1995) between descriptive, instrumental, and normative approaches to stakeholder conceptions of corporations need to be kept in mind. According to this distinction, a stakeholder approach does not necessarily constitute an ethical (or normative) commitment to serve the interest of stakeholders. From a descriptive perspective, a stakeholder approach can be a mere description and recognition of the fact that corporations by their very nature require the contribution and collaboration of various stakeholder groups in order to attain their corporate objectives. Exercising corporate control in a manner that will ensure optimum contributions from and collaboration with stakeholders thus does not emanate from ethical considerations, but from the recognition that it is in the best interest of the corporation to consider the interest of stakeholders. An instrumental (or strategic) stakeholder approach implies that stakeholder interests are being respected in pursuit of some corporate objective, for example, the pursuit of shareholder value. Stakeholder interests, consequently, would be given priority only in so far as it contributes to the achievement of corporate objectives. In shareholder approaches to corporate governance, the interests of stakeholders are likely to be treated in such an instrumental manner. A normative (or intrinsic) stakeholder approach is premised on a relationship of ethical obligation between a corporation and its stakeholders. It is based on the assumption that, irrespective of whether it is a factual necessity or a strategic imperative to recognize or respect stakeholder interests, corporations have a moral duty to ensure that interests of stakeholders are considered in the exercise of corporate control.


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