Imperative of ethical principles in corporate governance

16 Nov 2020, 12:00 am
Oseini Wale Bamigbaiye
Imperative of ethical principles in corporate governance

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A business environment that promotes and upholds strong ethical values is usually a happier and more productive workplace.

A view of Kuala Lumpur business district

In its general introduction to ethics, the BBC defines ethics as a system of moral principles. Also described as moral philosophy, ethics plays a key role in the way people lead their lives and take decisions. Ethical considerations constitute the bedrock of good corporate governance.  

While organisations seek to achieve their corporate goals, including maximising profit; they have a responsibility to pursue their goals in an ethical and sustainable manner. A company or organisation that seeks long-term growth and sustainability must encode ethical principles within its corporate governance, which describes how organisations are managed, directed and controlled.

Corporate governance prescribes a set of rules and principles. These principles often entail transparency, accountability, honesty and openness. Enshrining ethics as part of these principles provides the framework for managerial and employees’ behavioural expectations. It becomes the responsibility of the management to ensure that workers abide by the organisation's code of conduct.

It may be argued that determining what is right or wrong is subject to cultural and individual relativism, and that what is considered ethical is a product of an individual’s moral perspective. However, the absence of business ethics in the corporate realm prevents companies from acting or taking decisions that are in the best interest of all stakeholders. This is not a function of relativism, or people’s subjective ideas about morality and ethics. Many businesses have failed over the last couple of years mainly because they lacked strong business ethics underpinning their corporate governance.

In looking at corporate governance from a compliance viewpoint, Surendra Arjoon, a Professor of Business and Professional Ethics at the University of West Indies at St Augustine, Trinidad, makes a clear distinction between legal compliance and ethical behaviour. Arjoon makes the case that legal compliance to regulations is not enough to enable companies build confidence and public trust. According to him, promoting ethical behaviour goes a long way in engendering good governance, which results in more accountability.  

The need for ethical value considerations in corporate governance was amplified by the New York Stock Exchange (NYSE) in 2002 when it introduced its corporate governance standards for listed companies. The NYSE stated that: "No code of business conduct and ethics can replace the thoughtful behavior of an ethical director, officer or employee. However, such a code can focus the board and management on areas of ethical risk, provide guidance to personnel to help them recognize and deal with ethical issues, provide mechanisms to report unethical conduct and help to foster a culture of honesty and accountability."

South Africa’s King II Report on Corporate Governance 2002 also emphasizes the importance of ethics in corporate governance. Dealing with organisational integrity, Section 5.2 of the code of corporate practices and conduct calls on organisations to implement, monitor and enforce the code of ethics at a high level. It also calls on companies to assess integrity when promoting employees. Furthermore, the code requires companies to train employees on company values.

The King Report on Corporate Governance also asks for disclosures to include the directors’ opinion as to the extent to which ethical standards are met. The need for companies to re-evaluate their relationships with people who have lower ethical standards is also addressed in the code of ethics.

The Nigeria Corporate Governance Code 2018 aims at institutionalising best practices in corporate governance in Nigeria. The code provides key principles by which companies can enhance their integrity in the business environment. Article 24 of the code highlights the imperative of ethics in corporate management, governance and administration, putting it succinctly as follows: “The establishment of professional business and ethical standards underscores the values for the protection and enhancement of the reputation of the Company while promoting good conduct and investor confidence.”

Article 25 of the Nigeria Corporate Governance Code 2018 provides 12 principles and rules to help in driving ethical corporate culture and values. The principles are based on the 12 Ethical Principles for Business Executives developed by the Josephson Institute of Ethics, a non-profit organisation in Los Angeles, California.

The institute's ethical principles for enhancing accountability among business executives are honesty, integrity, promise-keeping and trustworthiness, loyalty, fairness, concern for others and respect for others. The other principles are law abiding, commitment to excellence, leadership, reputation and morale, and accountability.

Ethical executives are expected to be absolutely honest and truthful. They are to demonstrate personal integrity by doing what they think is right even when they could benefit by doing otherwise. They are to be worthy of trust and always commit to fulfilling their promises. Ethical executives are those who demonstrate fidelity to persons and institutions they work with. They are to scrupulously safeguard information learned in confidence and avoid conflicts of interest.

They are people who are fair and just in all their dealings and avoid taking undue advantage of other people’s mistakes or difficulties. Ethical executives are those who are caring, compassionate, benevolent and kind to others. They also show respect for human dignity and the rights of others.

Such executives are also those who abide by laws, rules and regulations. They are not mediocre. Ethical executives are always conscious of the responsibilities and opportunities of their positions of leadership. They protect and enhance the company’s good reputation and the morale of employees. According to the Josephson Institute of Ethics, ethical executives acknowledge and accept personal accountability in all their decisions

Unfortunately, the Nigeria Corporate Governance Code 2018 is subject to voluntary compliance. The principles are labelled as recommendations, although the Financial Reporting Council (FRC) and other regulatory authorities have the responsibility and power to demand compliance with the code.

Ethical business practices do not necessarily result in increased profit for companies in the short term. However, they are essential for long-term organisational survival. Behaving in an ethical manner can create positive business results. A business environment that promotes and upholds strong ethical values is usually a happier and more productive workplace. Customers and other stakeholders are served well, ensuring their loyalties to the organisation.

Oseini Wale Bamigbaiye (LLB, BL, Acis.) is Principal Partner at Corporate Legal Consulting.

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