Ethics In Corporate Governance
What do you understand by good corporate governance? What are the ethical concerns in the private sector
- Introduction – define corporate governance. Explain using companies law and few examples
- Body – discuss the ethical issue in private sector
- Conclusion – use companies law to suggest how to develop ethical standards in corporate governance
Corporate governance is the system of rules, practices and processes by which a company is directed and controlled. Corporate governance essentially involves balancing the interests of a company's many stakeholders, such as shareholders, management, customers, suppliers, financiers, government and the community.
Good corporate governance
The Cadbury Report which was released in the UK in 1991 outlined that "Corporate governance is the system by which businesses are directed and controlled." Good corporate governance is a key factor in underpinning the integrity and efficiency of a company. Poor corporate governance can weaken a company’s potential, can lead to financial difficulties and in some cases can cause long-term damage to a company’s reputation.
A company which applies the core principles of good corporate governance; fairness, accountability, responsibility and transparency, will usually outperform other companies and will be able to attract investors, whose support can help to finance further growth.
The key principles are
- Fairness: Fairness refers to equal treatment, for example, all shareholders should receive equal consideration for whatever shareholdings they hold.. However, some companies prefer to have a shareholder agreement, which can include more extensive and effective minority protection. In addition to shareholders, there should also be fairness in the treatment of all stakeholders including employees, communities and public officials. The fairer the entity appears to stakeholders, the more likely it is that it can survive the pressure of interested parties.
- Accountability: Corporate accountability refers to the obligation and responsibility to give an explanation or reason for the company’s actions and conduct. In brief:
- The board should present a balanced and understandable assessment of the company’s position and prospects;
- The board is responsible for determining the nature and extent of the significant risks it is willing to take;
- The board should maintain sound risk management and internal control systems;
- The board should establish formal and transparent arrangements for corporate reporting and risk management and for maintaining an appropriate relationship with the
company’s auditor, and
- The board should communicate with stakeholders at regular intervals, a fair, balanced
and understandable assessment of how the company is achieving its business purpose.
The Board of Directors are given authority to act on behalf of the company. They should therefore accept full responsibility for the powers that it is given and the authority that it exercises. The Board of Directors are responsible for overseeing the management of the business, affairs of the company, appointing the chief executive and monitoring the performance of the company. In doing so, it is required to act in the best interests of the company.
Accountability goes hand in hand with responsibility. The Board of Directors should be made accountable to the shareholders for the way in which the company has carried out its responsibilities.
- Transparency: A principle of good governance is that stakeholders should be informed about the company’s activities, what it plans to do in the future and any risks involved in its business strategies. Transparency means openness, a willingness by the company to provide clear information to shareholders and other stakeholders. For example, transparency refers to the openness and willingness to disclose financial performance figures which are truthful and accurate. Disclosure of material matters concerning the organisation’s performance and activities should be timely and accurate to ensure that all investors have access to clear, factual information which accurately reflects the financial, social and environmental position of the organisation. Organisations should clarify and make publicly known the roles and responsibilities of the board and management to provide shareholders with a level of accountability. Transparency ensures that stakeholders can have confidence in the decision-making and management processes of a company.
ETHICAL CONCERNS IN PRIVATE SECTOR:
- In private companies, moral principles like ethics regimes, ethics reforms, codes of conduct, codes of ethics, and ethics rules were not initially developed.
- Compromising on ethics to increase profits Ex: Compromise on safety standards of workers
- Another major ethical concern is transparency. All over the world, there are many business and accounting scandals happened that made companies to operate with openness and transparency.
- Founders' Control and Succession Planning: In India, founders' ability to control the affairs of the company has the potential of derailing the entire corporate governance system. Unlike developed economies, in India, identity of the founder and the company is often merged. The founders, irrespective of their legal position, continue to exercise significant influence over the key business decisions of companies and fail to acknowledge the need for succession planning. Family owned Indian companies suffer an inherent inhibition to let go of control.
- Privacy and Data Protection issues: Good governance will be only achieved if executives are able to engage and understand the specialists in their firm. The organisation must assess the potential risk of handling data and take steps to ensure such data is protected from potential misuse. The organisation must invest a reasonable amount of time and money in order ensure the goal of data protection is achieved.
- Private companies are generally expected to provide favourable working conditions for their personnel in the business environment, but being responsible with employee treatment typically means higher labour costs and resource utilization.
Need for Good corporate Governance
- To compete at global level
- Private companies are also facing new restrictions. As people have become more knowledgeable, customer concern has become gradually focused on the ethical, environmental, and labour standards. Ex: Public demonstrating against the companies whose practices are unethical. Boycott of companies accused of child labour, employee harassment and abuse.
- Growing moral concern of customers have rapidly and completely redesigned the business environment in which companies operate. Reputation has now become more important which not only commands the economic victory of a company, but its existence.
- It will help them adhere to the rules and laws of the country- reduce litigation cost and other forms of sanctions- help increase their profit
- Employees are happy to work in such organisation- increases efficiency of the organisation
- legal requirements- In almost every sphere of business activity laws have been enacted & declared certain business practices as illegal & prohibited.
As far as structural and regulatory changes are concerned, India has witnessed several enactments - the Companies Act, 2013 and SEBI's listing obligations and disclosure requirements regulations, which have contributed significantly in strengthening governance norms and in increasing accountability by way of disclosures. Interestingly, these changes have been inspired by the Anglo-Saxon model of corporate governance, which is probably one of the key reasons behind current practices of corporate governance not achieving the desired level of fruition. For achieving desired results, it is important that regulatory measures are modelled based on the practices and business environment in India.