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What is the Relationship Between Business Ethics and Corporate Governance?

By Osmand Vitez
Updated May 16, 2024
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Business ethics and corporate governance are two significant factors that impact a company and how it operates. Business ethics represent the values, principles or characteristics that a company follows when conducting business in the economy. Corporate governance is the internal framework that a company designs and implements to govern and protect those invested into the company. The relationship between ethics and governance comes from an organization’s owner or executive managers, who create the governance and decide which ethical principles employees will follow.

Business ethics typically follow a normative theory. This theory states that individuals and firms will follow ethical principles that are commonly found in society, hence the term normative, or standard, ethics. Three normative ethic theories include stockholder, stakeholder, and social contract theories. The stockholder ethical theory states that a company should create a relationship between business ethics and corporate governance that focuses on stockholders. Managers will employ strategies and activities that advance or increase the investments of share holders.

Under the stakeholder theory of ethics, business ethics and corporate governance focuses on anyone who has a stake in the business. Although wide ranging, this connection between these factors is often stronger, as recent changes to corporate governance include now any individual who is affected by the company. This connection ensures that everyone receives equal or fair treatment when dealing with the business. For example, customers who purchase a faulty product may receive a replacement at no charge and a few extra benefits. This promotes business ethics throughout the organization.

A third and final ethical theory is the social contract theory. This theory focuses on companies that improve the overall welfare of society. Shareholders may be less willing to invest money into a company that follows this ethical theory, as shareholders may lose money to causes or other benefits that are outside of the company’s normal operating context. To make investors fully aware of the company’s social contract theory of ethics, business owners, executives and board members will often include this information in the corporate governance.

Another relationship between business ethics and corporate governance is a company’s mission statement. The mission statement clearly outlines a company’s planned standard of excellence for operating in the business environment. This mission statement can focus more on a social aspect of the operations rather than a profit motive to repay shareholders. In these types of companies, shareholders will invest in the company because they believe in the company and desire to see the company succeed in its social mission.

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Discussion Comments
By jonrss — On Apr 17, 2012

I have always found the whole notion of a business code of ethics to be interesting and tricky. I think that companies have a legitimate interest in behaving ethically and many make an honest effort to operate in an ethical way. But at the same time the bottom line ultimately trumps any ethical question.

If the decision is between doing the wrong thing or going out of business, many corporations will do whatever it takes to survive. This does not have to be hugely evil or sinister, but when faced with failure even the most high-minded ethics can begin to crack.

By ZsaZsa56 — On Apr 16, 2012
Business ethics are crucial for a company to run effectively. It is a vital part of any corporate governance structure to monitor the ethical character of the institution. The reason is that there can be serious consequences for employees, customers and shareholders if a business behaves unethically.

Look at the recession of 2008. A big part of the collapse was caused by unethical behavior. There may not have been laws prohibiting the things that people did, but they obviously had negative consequences for a lot of people. Millions lost jobs and huge fortunes were lost in the markets. Those are serious consequences for behaving unethically.

By nextcorrea — On Apr 16, 2012

Once when I was in grad school we had a librarian from Monsanto come and speak to our class. The subject was corporate ethics. She talked about the importance of strict business ethics and the lengths that Monsanto had gone to create an ethical culture within the company.

They had actually established a department within the company to review practices and ensure ethical behavior. I don't think that all companies go to this level to remain ethical but I am glad to know that some do.

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