The Essential Component of Corporate Governance

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Center for International Private Enterprise

Feature Service®
January 12, 2006

Business Ethics: The Essential Component of Corporate Governance John D. Sullivan, Ph.D.
Executive Director, CIPE

Aleksandr Shkolnikov,
Program Officer, Global, CIPE

Given financial scandals and the resulting new mandates on business, firms find themselves pressed to develop strong codes of ethics to guide the behavior of board members, managers, and employees. Although the concern with ethics has always been a part of doing business, business leaders today are beginning to think about ethics as a set of principles and guides of behavior rather than a set of rigid rules. In this sense, business ethics is not only an attempt to set a standard by which all of the employees of a firm can know what is expected, but it is also an attempt to encourage employees, managers, and board members to think about and make decisions through the prism of a shared set of values. Future debates will center on the relative roles of the triangle of business, government, and NGOs in establishing these standards, as they find a way to meet high ethical standards and, at the same time, ensure that the reputational and collateral risks assumed by corporations do not inhibit the further development of the emerging markets.

Center for International Private Enterprise
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Center for International Private Enterprise

Business Ethics: The Essential Component of Corporate Governance

Business ethics and corporate governance have become key factors influencing investment decisions and determining the flows of capital worldwide. In part, this is the result of recent scandals in both developed and developing countries. However, in a more positive sense, the growing demand for good governance also flows from the lessons learned about how to generate rapid economic growth through market institutions. From this perspective, the emphasis on anti-corruption and good governance is based both in moral standards as well utilitarian considerations of improved market performance. While ethics and an ethical business culture are at the heart of the corporate governance framework, the two are approached somewhat differently. Corporate governance is concerned mainly with creating the structure of decision-making at the level of the board of directors and implementing those decisions. In this sense governance can be thought of as steering the corporation. In fact, the very word governance itself comes from the Greek word for steering. Moreover, corporate governance is about accomplishing the core values of transparency, responsibility, fairness, and accountability. Because these values are also key concerns for business ethics, the two can be seen as being directly related. However, the corporate governance aspect deals with setting up the structures through which these values are attained, while ethics is both a guide for behavior and a set of principles (or a moral code). While a good ethics system includes the core values of responsibility, transparency, fairness, and accountability, it goes into many other dimensions as well. This paper summarizes the general issues of corporate governance; provides an overview of the philosophy of ethics; discusses business ethics in some depth; presents some of the various approaches and guidelines for developing an ethical code; reviews some of the special factors of ethics in business and banking; and describes the responsibility and approaches that a company or a bank can take to develop an ethics program. Finally, the conclusion reviews some of the benefits and challenges arising from the consideration of business ethics in the international environment. –2–

Box 1. OECD Corporate Governance Principles. 1. Ensuring...
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