Home Media SCU Leavey Blog Ethics in Corporate Governance

Ethics in Corporate Governance

29 Mar
Two men in suits shake hands as they discuss ethics in corporate governance.

Corporate governance, according to Investopedia, “is the system of rules, practices, and processes by which a firm is directed and controlled” and is usually managed by a company’s board of directors. The four P’s, or key categories of corporate governance, are people, process, performance, and purpose.1

Corporate governance rules are important because they outline a company’s ethical beliefs and provide a working roadmap for a company's objectives and activities. In short, these plans affect and influence every aspect of a company’s daily operations and management.

Companies use the rules of corporate governance to balance and meet the needs of their different stakeholders, which can include financiers, the community, employees, shareholders, suppliers, customers, and senior executives. Done well, “corporate governance leads to ethical business practices, which leads to financial viability.”1

Read on to learn about:

  • The role of ethics in corporate governance
  • Prime examples of corporate governance that are propelling today’s most successful businesses forward
  • How you can acquire the top-level financial and analytical business skills to design—and implement—effective corporate governance plans

What is the role of ethics in corporate governance?

Today’s business industry, according to many public opinion polls, is not “highly trusted.”2 Therefore, it’s more important than ever for today’s companies to set well-defined, actionable governance plans that are rooted in the ethical values of integrity, honesty, and openness as they conduct their operations.2

Doing so encourages positive behaviors that lead to long-term business success and sustainability. It also helps companies gain increased trust, the intangible—but very valuable—social and cultural currency by which companies can:

  • Become authorities in the space to drive business and capture market share
  • Garner repeat business
  • Gather support, funding, and positive public opinion

All of these measures can boost a company's revenues and long-term viability.

Fortunately, many modern businesses are aware of the benefits of ethics in corporate governance and desire to operate “the right way” by following governance rules that lead to:

  • Accountability
  • Transparency
  • Fairness
  • Responsibility1,2

Companies use ethically-focused corporate plans that enable them to follow a set of well-defined values and avoid common issues in corporate governance, including mismanagement, non-compliance, and fraud.

Rules set forward by a diverse board of directors help companies see the needs of all stakeholders and create plans that address the needs of today and the future, equitably. As a result, these companies are growing both internal and external trust levels, to the benefit of internal and external stakeholders.

When it comes to ethics in corporate governance, the following aspects should be considered when: environmentalism, compensation, risk, ethics, and corporate strategy.1

Environmental Awareness

Ethics in corporate governance also covers environmental considerations. Our planet and the environment are important stakeholders that require fair consideration when drawing up governance plans. Environmental awareness leads to the sustainable, efficient development of our planet and limited resources, ensuring that both are protected for future generations, animal, plant, and human.

How a company acquires, manufactures, sells, transports, and recycles/disposes of its goods and services once used are all questions a company should be asked and address in an environmentally-conscious governance plan.

Oil drilling, plastic waste, and deforestation are all aspects of business creation that can have detrimental effects on the environment if not properly managed and conducted with sustainability and pollution reduction in mind. Responsible corporations should evaluate corporate behavior to determine future financial performance and longevity and how it will affect the environment, looking for ways to mitigate any negative results while ensuring their businesses can thrive long-term.3

Fair Employment

According to the Society for Human Resource Management (SHRM), fair compensation means “compensating employees the same when they perform the same or similar job duties while accounting for other factors, such as their experience level, job performance, and tenure with the employer.”4

It’s important for companies to follow equitable compensation as it leads to happier employees, better performances, less turnover, better skillsets, and better business outcomes overall.4 In today’s evolving office climate of more flexible work options include remote work and hybrid work, employee safety, office setting, and social/political concerns within the workforce need to be addressed in a competent governance plan.3

Risk Awareness and Compliance

When it comes to risk awareness and management, companies should design governance plans that are executable by their executive/managerial teams and enable them to do:

  1. Identify risks for various stakeholders
  2. Assess potential severity of each risk
  3. Create risk action plans to solve/mitigate risk
  4. Evaluate the effectiveness of risk management
  5. Adapt risk management plans as needed

Cultural forces that marginalize risk prevention must be eliminated.3 Additionally, a company’s board of directors should evaluate management’s risk performance to ensure that it is are able to receive the correct risk information, determining if current management can implement risk and compliance strategies and systems. Doing so helps keep the company operating at an optimal level that reduces fraud, theft, and exploitation. It is imperative that a diverse board of directors perform this risk assessment so that an accurate picture of the risks to all stakeholders can be produced.

Business Ethics

There’s a good reason to conduct business responsibly and ethically: ethical business decisions that benefit all stakeholders, as fairly as possible, allow a company to place itself as an attractive option to investors.1

Creating an ethical culture that rewards those who conduct themselves within the rules of compliance helps generate a workplace environment that values proper conduct over improper behavior. Business operations that ignore ethics can lead to legal and financial ruin, brought on by attempts to cut corners, cut costs, and circumvent timely and expensive compliance measures, should be addressed and curtailed.

Examples of Ethics in Corporate Governance

Like any business activity, corporate governance can be conducted well or poorly. The following examples show the contrast between the two approaches to ethical governance and highlight the reasons it’s better, business-wise, to conduct responsible, ethical business transactions that are fair to stakeholders.

Examples of Good Corporate Governance

  1. Clearly defined, up-to-date, widely-shared corporate governance plans
  2. Incentives for environmentally-beneficial behaviors
  3. Routine internal audits with external oversight
  4. Shareholder and stakeholder engagement
  5. Long-term sustainability planning
  6. Compensation rewards for ethical business behavior

Examples of Bad Corporate Governance

  1. Boards structures that prevent ineffective members from being ousted
  2. Non-compliance with auditors and regulators
  3. Compensation packages that fail to create incentives for corporate officers to adhere to ethical governance
  4. Operations that allow conflicts of interest to flourish
  5. Lack of transparency

While once-thriving companies like Enron and Worldcom undertook poor, unethical governance which eventually led to their downfall, active proponents of ethically-based corporate governance practices have been rewarded with ongoing business success, including Pepsico.1

Learn Corporate Governance at SCU

Corporate governance is an important issue for today’s businesses, large and small. If you’re ready to learn about responsible business practices and ethically-driven corporate governance plans, Santa Clara University is your destination.

SCU’s Leavey School of Business has a financial master’s curriculum that teaches the latest in business skills and strategies—including ethical corporate governance rules—that are the cornerstone of today’s businesses. SCU’s FNCE 2400: Corporate Finance and Financial Analysis course teaches a foundation in the basic concepts of corporate finance, including corporate governance and issues in corporate governance.

Modern businesses need qualified, competent, and confident leaders who can design corporate governance rules that will lead to equity for all stakeholders, and in turn, financial stability and sustainable growth.

With its robust academics and Silicon Valley focus, SCU’s online master’s of finance and analytics prepares you to thrive in corporate finance settings and investment-focused organizations. SCU Leavey is also nationally recognized for its strong faculty of experienced professionals, its forward-looking curriculum, its powerful Bronco network, and its outstanding career outcomes and academics.5

SCU’s Online MSFA is ranked the #12 Best Online MBA for Finance program according to U.S. News and World Report.5,6 SCU Leavey business school has been ranked #1 for Academic Experience and #1 for Career Outcomes by Poets&Quants.6

Earn a Top-Tier Online Finance Master’s at SCU

The Online MS in Finance and Analytics from Santa Clara University’s Leavey School of Business is a great way to sharpen in-demand business skills and build a powerful Silicon Valley network. Learn more about our world-class business faculty, and consider how their connections and accomplishments can be vital building blocks for your career.