Thoughts on Good Governance and Corporate Ethics

by:

Prof. Aliza Racelis

To some people, the world of finance and business is purely mechanical, devoid of ethical considerations. But as has become quite obvious, given the long list of prominent business scandals just around the turn of the twenty-first century, there is no escaping the fact that ethical reasoning is vital to the practice of business and finance. In particular, integrity is paramount for a successful managerial career: one must grasp the norms of ethical behavior if one wants to succeed in the field of finance and business (Bruner et al., 2009; Racelis, 2011).

In the last few years, the corporate world has come under increasing pressure to behave in an ethically responsible manner. In particular, recent accountability failures have led to bankruptcies and restatements of financial statements that have harmed countless shareholders, employees, pensioners, and other stakeholders. These failures have created a crisis of investor confidence and caused stock markets around the world to decline by billions of dollars. Standards for what constitutes ethical behavior lie in a hazy area where clear-cut right-versus-wrong answers may not always exist (Racelis, 2010; Walker, 2005).

Scholars from a variety of disciplines have contributed significantly to solidify the literature in this area. For instance, the literature on the so-called Corporate Social Performance (CSP) burgeoned from the 1970s on, which generally suggested a model of social responsibility that embodied the economic, legal, ethical, and discretionary responsibilities of business. In addition to this perspective, ethical theories have been developed and used that cement the relationship between business and society: they are based on principles that express the right thing to do or the necessity to achieve a good society (Garriga and Melé, 2004). Related to this approach is the normative stakeholder perspective, which assumes that managers bear a fiduciary relationship to stakeholders. The interests of all stakeholders are of intrinsic value, that is, each group of stakeholders merits consideration for its own sake and not merely because of its ability to further the interests of some other group, such as the shareowners (Freeman and Philips, 2002). This literature, however, has suffered critical distortions and friendly misinterpretations, as it struggled to point out more concretely how corporations have to be governed and how managers ought to act: a potpourri of normative ethical principles has had to be proposed by various scholars.

Even in the “most perfect” of cases, however, corporate governance mechanisms ―increasing ownership concentration, improving independence of board directors, refining explicit and implicit executive incentives, formulation of a Code of Ethics, etc.― may not totally resolve the problems in this area. In other words, there is no guarantee that Rules, Codes, Manuals, and the like, can elicit morally upright behavior from organizational members.

There are at least two ‘strains’ of research in corporate ethics that are emerging that might help “ease the pain”: (1) the importance of Organizational Culture ―the creation of an ethical culture― imbuing and permeating the entire organization, from the top brass to the last member, so that everyone is steeped in this “moral reasoning”, and (2) the emergence and introduction of Virtue Ethics as part of the agency solution in the corporate form of organization.

It has been proposed that managers add an attention to virtues and vices of human character as a full complement to moral reasoning according to a deontological focus on obligations to act and a teleological focus on consequences. This is so because an ethic of virtues (and vices) emphasizes the process of personal moral char acter development (Whetstone, 2001).

Considering managerial ethics from a virtues perspective allows us to discuss the strengths or weaknesses of the character of the individual. For instance, a person can, and should, resist given pressures, even at considerable cost to oneself. That is the very basis on which virtue ethics has proven to be so appealing to people in business. It is the hope that they can, and sometimes will, resist or even rise up against pressures and policies that they find to be unethical. (Solomon, 2003).

Surely, this research area continues to be fraught with difficulties and challenges. Some of these are as follows:

(1) Development and validation of a “Virtue Ethics Scale” similar to the Virtue Ethical Character Scale (VECS) of Chun (2005) ―except that a survey of virtues at the individual level is proposed―, the Corporate Ethics Scale (CES) of Hunt, Wood and Chonko (1989) or the Schwartz Value Survey (SVS) (Schwartz, 1992).

(2) Continued development of measures or measurement tools for the ethical and social performance of companies. If the stakeholder theory of the firm is to be believed, business firms should attempt to maximize value not only for their owners but for all stakeholders taken together (Poblador, 2006).

(3) New “metrics” have to be discovered or developed that assist management in ensuring that the company is managed in the best interests of the shareholders and the other stakeholders.

(4) Empirical studies that would show that the possession of the elicited desirable character traits or virtues leads to ―or at least is correlated with― successful organizational performance (financial or otherwise). An important facet of “ethical investment” is whether there is a beneficial effect on shareholder value, defined at least in the short run by profitability and other financial performance indicators (Mallin et al., 1995; Sethi, 2005; Racelis and Soledad, 2009). This can be operationalized by taking the responses to the “Virtue Ethics Scale” and regressing or correlating them with such organizational characteristics as: financial performance, stock price performance, work satisfaction, corporate success factors, firms’ market-orientedness, success in mergers and acquisitions, and various other performance-related variables.

For further references, click the following blog articles: [1] [2] [3]