Corporate governance plays an important role in explaining how companies manage their relationships externally. When a company is listed on a market stock exchange, those buying shares require to know about the relationship. This document explains the development of a corporate governance scheme, ethical behaviour, and corporate code of ethics, their importance and how a company can utilise them.
2. Corporate governance and why it matters
There is no academically accepted definition of Corporate governance but it can be described as a conventional developed group of legal, institutional and cultural provisions that determines and limit what publicly traded companies can do, how they are controlled, who controls them and how they allocate risks and returns from the activities they undertake(Clarke and dela Rama, 2008). These provisions are guidelines towards decision making in the company and have been used as an assurance to the investors that their interests are protected (Gonçalves et al., 2012 p28). Corporate governance is developed ensure there is an effective working framework in investment, the right and limits of shareholders, equal treatment of the shareholders, the mandate of the dictated to shareholders and the disclosure and transparency system of the company (Klazema,2014). Corporate governance has been seen as a tool the investors use to check the basic activities running of the company and the investment strategies in a particular company. A good corporate governance increases the chance of a company to receive funding, attract the best workforce, manage risks and build a good market reputation. It also builds internal control processes which enhances transparency, accountability and discipline within the organization.
3. Mechanisms for corporate governance and best practice
The collapsing of various huge companies has been the bases of countries around the world developing framework to protect investors from a similar occurrence. Individual countries enforces their own corporate governance policies using guidelines developed by regional blocks and the UN. Different research classify the mechanism adopted according to either level of management, the organisation structure or conflict of interest. Three types of mechanism have between identified when developing a good corporate governance framework using the organisation structure. The first is the internal mechanism which check the internal environment of the business. It checks on the development in the managers and other staffs and policies which controls the activities of the business. A good internal mechanism segregate the work of management to clearly define their role for smooth business operation and a good relationship with the board and the external owners of the company (Davoren, n.d). To enhance internal mechanism the company can make the boards more independent and frequent change of management to enhance transparency (Hauswald and Marquez, 2009) The second mechanism involves external control of the organization. It affects those who control the business from outside but are not involved directly in it management. These entities include the government agencies, the market regulators, trade unions and financial institution. They are regulated through market code of conduct and contract. A good corporate governance should address the conflict of interest that arises from tax payment, employee conflict management and management of debt. The last mechanism involve the ease and possibility of auditing of the firm. The system developed in the company should ensure the audit follow the government standards and provide the real reflection of the company (Vitez, 2017). The shareholder usually rely on audit report to measure the value of their investment while potential investors use audit report to decide on whether to invest in a given venture.
4. The importance of ethical behaviour
Ethical behaviour plays an important role relationship between the employees in an organization and the management which has an overall impact on organization performance (Leśna-Wierszołowicz, 2012 p39). Some of the practices done by businesses are legal but ethical. Within a business environment, ethic guides the decision-making process, action of employees and management and the business action and behaviours. The ethical behaviour of a company acts as the mirror to organization culture, shared value and integrated behaviour which become a part of the organization definition to those surrounding and working in it (Trung, 2015). The ethics of a company describe what the company stands for in the social and corporate environment. It defines the management structure and the activities are guided by their practice. Bad ethical practices tarnish the reputation of an organization and can lead to its fall. The ethics that govern the human resource are also important because they dictate relationship within and outside the company. Good ethical practices can earn a business a positive advantage to in the market. Customers are attracted to an upright ethical business which will, in turn, increase the earning (Trung, 2015 p12). Also, investor likes to invest in a business where they can trust the audit and the business activities without losing their investment. This increases the chances of the business receiving funding when listed in the stock market or seek financial assistance from funding companies. Companies engaging in unethical practices likely to face legal consequences or face public criticism which may result to loss of market share.
5. Steps for ethical decision making
Several decision models have been developed to support the process of ethical decision making, for example; the Rest model which is developed on based as assessing a particular decision on consciousness, decision, intent and behaviour (Craft, 2013). With different models which can be adopted in ethical decision making it is important to assess important consideration before making a decision. This consideration includes the consequence of the decision, the degree of agreement on how a particular decision is ethical, concentration effect and the proximity to implementing a decision. The ethical decision affects different levels of business when implement. The impact on each level should be assessed before implementation of a decision.
6. Corporate code of ethics
A code of ethics in the corporate environment are guides which are developed to help professionals in the business world to conduct their activities in honesty and integrity. It doesn’t only translate to the rules and the regulations which the organization embrace in its day to day activities, but set the rules of doing business by explaining those rules (Kaptein, 2017). The code is developed to guide employees on the expected behaviour and norms accepted in the organisation, the guidelines to follow when conducting business and relationship within the organization. A well-developed code of ethics to ensure the activities in a company run as planned and is an effective tool for conflict management. Everyone is aware of his responsibility and way to go about the business of the organization and the consequences of going against the stated rules are well established. It is also an important tool in financial and management practices in a company.
7. Conclusion
Corporate governance is a framework developed to specify the activities of a business from management to its relation to the inner and outside environment. It helps to shape how a company undertakes its activities, government regulation and investors use it to check on the performance of the company. The decision on whether something is ethical depends on the impact it will have and perception to those who will experience it. The ethical code in a business determines the organisation culture and perception by those who surround it. Ethical behaviours help to shape the organisation performance and culture. Code of ethics helps to shape the organisation practices.
8. References
Clarke, T. and dela Rama, M. eds., 2008. Fundamentals of corporate governance. Sage.
Craft, J.L., 2013. A review of the empirical ethical decision-making literature: 2004–2011. Journal of business ethics, 117(2), pp.221-259.
Davoren, J. (n.d.). Three Types of Corporate Governance Mechanisms. Small Business - Chron.com. available at: http://smallbusiness.chron.com/three-types-corporate-governance-mechanisms-66711.html
Gonçalves, T.A., Lima, N.C., OLIVEIRA, S., OLIVEIRA, M. and Queiroz, J.V., 2012. Corporate governance in financial strategy of companies listed in Bovespa. International Journal of Business and Commerce, 2(1), pp.24-39.
Hauswald R. and Marquez, R. 2009. Governance Mechanisms and Corporate Transparency. Available at: http://www1.american.edu/academic.depts/ksb/finance_realestate/rhauswald/papers/Governance%20Mechanisms.pdf
Kaptein, M. (2017). The living code: Embedding ethics into the corporate DNA. Routledge.
Klazema, A. 2014. The Importance of Corporate Governance. Available at: https://blog.udemy.com/importance-of-corporate-governance/
Leśna-Wierszołowicz, E. 2012. THE IMPORTANCE OF ETHICS IN BUSINESS. Oeconomica 298 (69), 39–48
Trung, QP,. L. (2015). The Role of Ethics in Business Operations. Otaniemi . Available at: http://www.theseus.fi/bitstream/handle/10024/110561/The+Role+of+Ethics+in+Business+Operations+PDF.pdf;jsessionid=122A9684FE293F6410DC86F9627096A3?sequence=1
Vitez, S. (2017). Three Types of Corporate Governance Mechanisms. Available at: https://bizfluent.com/list-7168617-three-types-corporate-governance-mechanisms.html
