“STUDY ON INTER-RELATIONSHIP BETWEEN BUSINESS ETHICS AND CORPORATE

GOVERNANCE”

Correspondence Author
Ms. Nandini Singh Bhati
Research Scholar
Department of Business Management and Commerce,
Mandsaur University, Mandsaur (MP), India

Co – Author
Ms. Chaitali Bhati
Research Scholar
Department of Tourism & Hospitality Management,
Mandsaur University, Mandsaur (MP), India

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ABSTRACT

This theoretical paper examines the importance of relationship between corporate governance and business ethics that
impact organizations and individuals. Every organization, as they grow has several stakeholders like stakeholders,
employees, customers, vendors, community, etc. For survival and growth, they need to depend upon healthy relations with
all these stockholders. Hence organizations have to be compelled to give sensible returns for stakeholders however
conjointly smart jobs for employees, reliable products for consumers, responsible relations with the community and a
clean environment.

Business ethics is the application of general ethical principles to business dilemmas and encompasses a broader range of
issues and concerns than laws do, as everything that is legal is not ethical. Ethics involves learning what's right or wrong,
and then doing the right thing -- but "the right thing" is not nearly as straightforward.

Business Ethics has the following purposes: -

• To offer individuals the tools for handling ethical complexness in business
• Business decisions have an ethical component
• Ethical implications must be weighed before acting

Corporate governance cares relating to the ownership, control and accountability of companies, and how the corporate
pours it on of economic objectives relates to a number of wider ethical and societal considerations. It is the function of
best management practices, compliance of law in true letter and spirit and cohesion to righteous standards for effective
management and allocation of wealth and liberation of social responsibility for continuous and renewable development
of all stakeholders.

Good corporate Governance is essential to Growing Profits and Reputation. It represents the connection among
stakeholders that's used to confirm and control the strategic direction and performance of organizations. Accountability
could also be a key part still as demand for corporate governance, fortifying the latter in such a way that it provides a
transparent template for governing critical decisions, procedures, and activities.

Corporate Governance deals with the questions: (1) Who edges from corporate decisions/senior management actions?
(2) Who ought to have the benefit of corporate decisions/senior management actions?

Businesses ought to act ethically because of number of reasons .As performance is based on values, priorities, a mutual
effort at all levels to deal with corporate ethics begins with a clear understanding of core values, both individually and
organizationally. Good corporate governance begins with a company's own within practices and policies. While
corporate governance problems are common across organizations, each company requires governance principles that
are unique in their approach. Good governance is, ultimately, the prerequisite for continued growth and prosperity.

Corporate governance ensures that future strategic objectives and plans are established and that the proper management
structure is in situ. Companies that offer sensible governance, both in terms of practices and results can expect the
backing not only of investors but of customers too.

Corporate Governance represents the ethical framework, the ethical framework and the value framework under which an
enterprise takes decisions. In the long-term moral behaviour features a positive impact on the company's performance.

This paper discusses the elements of corporate governance, inter-relationship between business ethics and corporate
governance with reference to some of the Indian companies over the years and their impact in this era of globalization
and liberalization.

KEYWORDS: Business, Ethics, Corporate, Governance

INTRODUCTION

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 Over the last 5 decades, corporate governance has captivated an excellent deal of public interest as a result of its
apparent importance for the economic health of companies and society, nowadays each corporate sector has to
operate in a competitive practice. If managers consider only law in making decisions its implications can be
highly dangerous. Hence, business ethics help approaching moral problems more systematically and
reasonably.

Business ethics and corporate governance are complementary to each other. “If corporate governance is pillar,
on which business run long time then, business ethics is mortar which makes strong and powerful to the
corporate governance to ensure that the Board of directors and management are discharging their function in
building and satisfying stakeholders confidence”

The major concepts in this study are corporate governance, business ethics, and stakeholder decisions.

BUSINESS ETHICS

Business ethics is a type of applied ethics that examines ethical rules and principles among a commercial
context. It is the application of general ethical principles to business dilemmas and encompasses a broader
range of issues and concerns than laws do, as everything that is legal is not ethical. Law often represents an
ethical minimum and Ethics often represents a standard that exceeds the legal minimum.

Ethics is learned more than it is taught. It is operation of general ethical principles to business dilemmas and
encompasses broader range of problems and considerations than laws do, as everything that's legal isn't ethical.
Hence we have a tendency to act primarily on our perceptions, but accurate or inaccurate they'll be. Ethics
involves learning what's right or wrong, then doing the correct issue -- however "the right thing" isn't nearly as
forthright.

Term ethics has been derived from the Greek world “ethos” which means character. Business ethics refer to a
set of moral principles which play a very significant role in guiding the conduct of managers and employees in
the operation of any organisation. Business ethics create self imposed discipline on the part of business.

PRINCIPLES OF BUSINESS ETHICS

The institute of business ethics has suggested the following seven principles

1. Be trustful
2. Keep an open mind
3. Meet obligations
4. Have clear documents
5. Become community involved
6. Maintain accounting control
7. Be respectful

THE FOUR IMPORTANT ETHICAL QUESTIONS ARE

1. What is?
2. What ought to be?
3. How do we get from what is to what ought to be?
4. What is our motivation for acting ethically?

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BUSINESS ETHICS CONSISTS OF

1. Defining appropriate behaviour

2. Establishing organizational values
3. Nurturing individual responsibility
4. Providing leadership & oversight
5. Relating decisions to stakeholder interests
6. Developing accountability
7. Relating consequences
8. Auditing & improvement

PURPOSE OF BUSINESS ETHICS

1. Provide people with the tools to deal with moral complexity in business
2. Business decisions have an ethical component
3. Ethical implications must be measured before acting

Most companies have put in place a code of ethics for its employees to conduct Ethics are the guiding
principles.

Where the proposed business activity/ operation of the company borders on the unknown, the company needs to
apply the ethics principle to decide on the project.

Businesses ought to act ethically because of number of reasons .As performance is based on values, priorities,
a mutual effort at all levels to deal with corporate ethics begins with a clear understanding of core values, both
individually and organizationally.

REASONS FOR ETHICS IN BUSINESS:

1. Meet expectations of stakeholder,

2. Prevent harm to the general public,
3. Build trust within key stakeholder groups,
4. Protect themselves from abuse of unethical employees and competitors,
5. Protect their own employees, and
6. Create an environment for workers to act in ways consistent with organisations values.

CORPORATE GOVERNANCE

Corporate Governance is the system of laws, rules and factors that control operations of a company.

A corporation is an enterprise authorised by law to conduct business. Governance implies a degree of authority
to be exercised by key stakeholders‟ representatives for the furtherance of corporate growth and protection of
stakeholders‟ interests.

Corporate governance ensures how effectively the board of directors and managements are discharging their
functions in building and satisfying stakeholders‟ confidence.

PRINCIPLES OF CORPORATE GOVERNANCE:

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 The Principles of effective Corporate Governance are

1. Transparency
2. Accountability
3. Independence
4. Reporting

According to Wikipedia the term "Corporate Governance" has come to mean many things.

Corporate Governance" is the sum total of value based decisions and actions taken by people at all levels in the
organization. It is an instrument to maximize shareholder value.

It may describe:

(1) The processes by which companies are directed and controlled encouragement of companies'
compliance with codes (as in corporate governance guidelines)
(2) Investment technique based on active ownership (as in corporate governance funds)
(3) A field in economics, which studies the many issues arising from the separation of ownership and
control

Corporate Governance deals with the questions:

1. Who benefits from corporate decisions/senior management actions?

2. Who should benefit from corporate decisions/senior management actions?

Figure 1: Five elements of corporate governance to manage strategic risk

Source: Drew et al. (2006)

Ethics refer to a set of moral principles which should play a very significant role in guiding the conduct of
managers and employees in the operation of any enterprise.

Ethics as the capacity to reflect on values in the corporate decision making process, to determine how these
values affect stakeholder decisions. On the other hand corporate governance refers to the accountability of the
board of directors of a corporation towards its stakeholders.

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Good corporate governance begins with a company's own within practices and policies. While corporate
governance problems are common across organizations, every company needs governance principles that are
distinctive in their approach. For this initiative to achieve success, the guiding principles ought to be clearly
understood and put into routine at each level within the company. This code ought to be adhered to in letter and
in spirit.

Commonly accepted principles of corporate governance include:

1. Rights and impartial treatment of stakeholders. Organizations ought to respect the rights of stakeholders
and facilitate the stakeholders to exercise those rights.
2. Interests of other stakeholders: Organizations should recognize that all legitimate stakeholders have
legal and other obligations.
3. Role and responsibilities of the board: The board desires a variety of skills and understanding to be able
to manage numerous business problems and have the power to review and challenge management
performance.
4. Revelation and transparency: Organizations ought to clarify and make publicly famed the roles and
responsibilities of board and management to bestow stakeholders with a standard level of accountability.
5. Integrity and ethical behaviour: Organizations ought to develop a code of conduct for their directors and
executives that promote ethical and accountable decision-making.

The applications of these principles would be governed by internally designed procedures that are unambiguous
and clearly understood. Good governance is, ultimately, the prerequisite for continued growth and prosperity.
Issues involving corporate governance principles include:

1. Oversight of the preparation of the entity's financial statements

2. Internal controls and the independence of the entity's auditors
3. Compensation review arrangements for the chief executive officer and other senior executives
4. The way in which individuals are nominated for positions on the board
5. Resources should be made available to directors in accomplishing out their duties
6. Oversight and management of risk
7. Dividend policy
8. Internal corporate governance controls

Internal corporate governance manages and monitors activities and then takes corrective action to accomplish
organizational goals.

INTERRELATIONSHIP BETWEEN CORPORATE GOVERNANCE AND BUSINESS ETHICS

Corporate governance and business ethics are two vital factors that directly affect the whole organizations and
cycle of operations. The responsibilities of a corporation aren’t solely economic however society and
progressively political specifically the government. Maintaining a correct perspective on this dimension is
important for the continued existence of the organization. It is no uncertainty a multifaceted job. Many
organizations believe in adopting the most effective practices with in the area of corporate governance.
Corporate governance is that the internal system of organizations to guard stakeholders‟ investment. Business
ethics deals with the relationship between business goals and approaches to specifically human ends. It denotes
the special responsibilities which a person and a citizen consent to when he becomes a part of the business
world. The relationship between governance and ethics emanates from managers (agents) or organization’s
owner (principal), who creates mechanisms to align the agents‟ interests with their own.

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Business ethics typically constitute a substantive normative theory. Hasnas (1998) sketches clearly that there
are 3 major theories of normative business ethics, namely, stockholder theory, stakeholder theory, and social
contract theory that are significantly relevant in this context .The stockholder theory suggests that managers
should resolve ethical problems by taking actions that enhances long-term shareholder value without violating
the law or engaging in fraud or deception. Under the stakeholder theory of ethics, managers ought to resolve
ethical issues by levelling stakeholder interests while not violating the rights of any stakeholder. Although wide
ranging, this association between these factors is commonly stronger, as recent changes in corporate
governance embody now anyone who is suffering from the organization. This association ensures that
everybody receives equal or honest treatment when managing with the business. Increasingly, stakeholder
theory is seen as a credible alternative to stockholder theory, or indeed labelled its intellectual successor. Yet,
despite the variations focused and scope, stockholder and stakeholder theories share commonalities in their
reasoning that is underpinned by sharing normative basis.

Finally, the social contract theory argues that managers ought to attempt to extend e social welfare higher than
what it might be in the absence of the existence of companies without violating the fundamental principles of
justice. Shareholders could also be less willing to speculate money into an organization that follows
this ethical theory, as shareholders might lose money to causes or alternative edges that are outside of the
company’s traditional operational context. To make investors totally conscious of the company’s social
contract theory of ethics, business owners, executives and board members can usually embrace this data within
the corporate governance. Other mission statements additionally progressively denote to corporate governance
and business ethics. It focuses a lot of on a social side of the operations instead of a profit motive to repay
shareholders. In these kinds of firms, shareholders can invest within the company as a result of they believe the
company and want to visualize the company achieve its social mission. The relationship was intense through
the immense quantity of press articles Organizations used different channels such as conferences, books, and
business press to disseminate such concepts .These diverse channels decode the concepts to their corresponding
audiences and increase to the popularization of the concepts.

Despite the prominence of the subject and an increasing demand for analysis, the correlation between corporate
governance and business ethics has continually been analyzed. Even in advanced market economies, there's a
good deal of disagreement on however good or unhealthy the prevailing mechanisms are (Shleifer&Vishny,
1997). Researchers and practitioners gave proof of overlapping nomenclature and cross-connections
between corporate governance and business ethics .Painter-Morland (2006) formed corporate governance and
business ethics are extremely interconnected and dependent upon each other. Most of the emerging market
research has centred on various factors that are related to firm valuation such as corporate finance and social
performance, corporate valuation, the level of disclosure, and ethical reporting (Pae & Choi, 2011). However,
very little has examined the association between corporate governance and business ethics.

From a corporate governance perspective, business ethics are the so-called “buttoning up of a company’s collar
and the straightening of its tie”; that is these are regulations concerning employee behaviour and conceptual
thinking, rules that make it clear that “good is good, and bad is bad”. Similarly, “corporate governance” should
include the function of making determinations regarding company behaviour, the function of adjusting and
fine-tuning the relative relationship with stakeholders, and the function of monitoring management activities
and results. Pea and Choi’s (2011) development of conceptual models, as shown in Figure 2, depicts two main
lines of thought relating to the relationship of corporate governance with business ethics: “good management”
and “slack resource”. According to “good management” theory, corporate ethical atmosphere is absolutely
connected to the standard of corporate governance in an exceedingly reciprocal manner. Strong corporate
culture enhances the quality of corporate governance and more compressive corporate governance, in turn,
stimulates the ethical environment in an organization. High quality corporate governance then leads to better
management and provision of high quality information, which reduces agency problems and firm-specific risk,
promotes both ethical commitment and corporate social performance. The resulting enhancement of market
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reputation improves the chance to recruit more capable employees. Even though smart corporate governance is
also vital in achieving higher future operative performance, it is not apparent that the advantages of excellent
corporate governance can manifest in an exceedingly company’s contemporaneous monetary performance.

Figure 2: The relationships between corporate and business ethics, and their value implications
Source: Pae and Choi (2011)
In corporate relationships, it appears affordable to expect that operating organizations ought to serve completely
different stakeholders in an ethical manner. A corporation ought to interact with its internal and external
stakeholders to work out its current ethical reputation amongst the stakeholders, also as what their ethical
expectations are of that organization. Thus, beneath the corporate governance needs, a corporation ought to
account for its ethical performance and punctually report it to relevant stakeholders. According to Khomba and
Vermaak , the discussion of the business ethics dimensions is varied, relying mostly on social and economic
components close the organizations involved. The view that prevails depends on the roles that organizations are
imagined to play internally and in society in generally. In micro-ethics, the central question is that the fairness
of the organizational selection of an economic system and additionally the ethical benefit of the key
components of such a system. Essentially, these key elements comprise the profit motive, private property, the
limited liability of corporations, competition, and free markets.

CONCLUSION

The present economic growth of the world market is ruled by technologies with a high speed of modification.
The emergence of corporate governance practices offers valuable insights into the mechanisms of institutional
transformation. It ensures that the long-run strategic objectives and plans are established and that the right
management structure is in situ. In the wake of a series of managerial misconduct and financial scandals, a
growing number of cogent policies and laws can develop a lot of comprehensive corporate governance to guard
and reduce financial risks of stakeholders‟ investments. To maximize the investment of the shareholders, who
risk their capital within the organization, corporate governance mechanisms exist to provide accurate
information to shareholders so that they may determine whether to continue their contracts with management.

Corporate governance is that the exercise of power over and responsibility for corporate entities, and Mallin
(2002) places responsibility as a part of ethics or care beside mechanism of control through laws and rules as
reflected in a number of definitions. The importance of corporate governance is emphasized by the belief that in
a world capitalist market framework, compatibility with developed markets is important and necessary.
Therefore, corporate governance ought to be seen as a framework for sustainable growth at any and all levels of
the organization. In this conceptual paper, organizations supported the dominance of basic complementary

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concepts and ideas in the business and society field, namely: corporate governance and business ethics. These
two vital components are positioned in terms of the prevailing business and society themes. In a corporate
perspective, it implies that organizations cannot restrict their actions and mechanisms without addressing the
concepts simultaneously. A holistic approach could facilitate organizations analyze the various aspects of
corporate governance and business ethics for higher economic development and sustainability similarly as
holding a proficient personnel.

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