Understanding the Role of Ethics in Corporate Governance

Ethics in corporate governance is the set of principles, policies, and behaviors a company adopts toward its stakeholders and in its internal planning. Ethics is extremely important because of its interconnection with transparency towards employees and customers, as well as the trust placed in the business by investors.

Strong ethical principles promote honest and responsible business behavior by all organization members. In this article, we will analyze how these principles influence strategy by mitigating misconduct and gaining market trust—regardless of the industry or international jurisdiction.

What Is Ethics in Corporate Governance?

Corporate ethics governance​ is the application of moral principles—such as integrity, fairness, accountability, and transparency—in business management. It is not restricted to compliance with regulations: it implies acting according to what is right, even when there is no legal obligation to do so.

Creating an ethical corporate system therefore allows governance choices to be aligned with responsible behavior that considers the impact on the environment and stakeholders.

Why Ethics Matter in Governance Structures

Ethics is the cornerstone of governance structures because it acts as a barrier against harmful behavior. The lack of solid ethical principles within corporate leadership can lead to financial scandals, loss of investor confidence, legal sanctions, and irreparable reputation damage. On the other hand, adopting an ethical structure has the following advantages:

• Long-term sustainability: Business ethics is generally more sustainable in the long term. Responsible behavior and policies are essential for financial growth.
• Reputation management: Another advantage of ethical corporate policies is an improvement in the company’s image in stakeholders’ eyes.
• Internal accountability and external credibility:  Business ethics promotes corporate responsibility and gives great credibility.

The absence of solid ethical principles has led to serious economic and reputational damage for large companies such as Volkswagen and Parmalat.

Principles of Corporate Governance and Ethics

Aligning corporate governance and ethics is the goal that every business strives for in order to achieve a responsible management model.

• Integrity: Honesty and truthfulness in day-to-day management and financial reporting help to create a climate of trust.
• Transparency: Transparency is the basis of relationships with internal and external stakeholders (in compliance with the principles of disclosure and transparency in corporate governance).
• Responsibility: Managers, board members, and executives are required to take responsibility for their actions toward the business in the event of poor performance.
• Fairness: Fairness and respect in the treatment of stakeholders are the cornerstones of profitable relationships inside and outside the company.

These four principles are the foundation on which an organization’s management structure must be built.

Corporate Ethics Governance Frameworks

In order to integrate the principles of corporate governance ethics into corporate governance, the company uses various tools and mechanisms. These are essential to maintaining ethics in the operating model.

• Code of ethics and conduct policies: Every business has its own rules and guidelines. These are the framework for all employees and stakeholders.
• Internal whistleblowing systems: The business must have secure and confidential channels that employees and stakeholders can use to report misconduct.
• Ethics and compliance training programs: Continuous training is necessary for organizations with sustainable business ethics models. Empowering employees and financial managers to follow ethical practices keeps the organization on track.

More and more companies are turning to an Ethics Officer or an Ethics Committee to oversee the functioning of these systems.

Role of the Board in Upholding Ethical Standards

The board of directors plays a central role in defining and maintaining ethics within corporate governance. It is here that the so-called “tone from the top” is established. Directors are responsible for:

• Promoting a corporate culture based on integrity and finance accountability.
• Approving and regularly reviewing ethical policies and codes of conduct.
• Ensuring that any violations are handled transparently and consistently.

In addition, the board must actively monitor risk areas, taking a proactive rather than a reactive approach. The effectiveness of ethical governance depends on constant vigilance and the board’s ability to take timely action, even when this involves difficult decisions. 

Corporate Governance and Ethics in Decision-Making

Ethics is not just a matter of principles but an active factor in corporate ethical decision-making processes. In critical business contexts such as mergers and acquisitions, finance strategies, and remuneration policies for top management, ethical dilemmas can profoundly influence a company’s direction.

For example, companies may terminate a partnership with a supplier due to a lack of respect for human or environmental rights despite the short-term economic advantage.

Even in crisis situations, such as internal scandals or environmental disasters, an ethical approach and sound governance practices can make the difference between regaining public trust and lasting reputational damage. 

Stakeholder Expectations and Ethical Governance

Stakeholders’ expectations are much more demanding today than in the past. The focus is no longer solely on finance, but how it is generated. The influence of the following factors is growing:

• Shareholder rights: Shareholders are no longer content with demanding dividends; they are increasingly interested in verifying that the business complies with ethical standards of conduct.
• ESG investors: Ethical conduct is increasingly necessary to attract capital. Many investors consider ESG criteria and look beyond simple financial performance.
• Employees and consumers: Employees want to work in a peaceful and inclusive environment, which indicates high ethical values. Consumers, on the other hand, prefer to buy from organizations they perceive as ethical, especially those with transparent practices.

Global Perspectives on Corporate Governance Ethics

Although interest in governance ethics is widespread worldwide, standards and jurisdictions vary in their interpretation.

In the US, the Sarbanes-Oxley Act of 2002 improved financial transparency standards by increasing penalties for violations. In Europe, however, the focus of the Corporate Sustainability Due Diligence Directive has been on respect for human rights and the environment during production.

Japan remains focused on long-term value creation, adopting a holistic approach to social and financial ethics.

This is why companies rely on corporate governance lawyers such as Ascot to standardize their policies in compliance with various regulations.

The Cost of Ethical Failures in Governance

Ethical failures in corporate governance can have serious consequences, such as:

• Financial losses and legal penalties: Misconduct can result in severe financial penalties and costly legal proceedings.
• Resignation of executives and damage to reputation: In the event of scandals due to executives’ misconduct, reputation damage can be very serious.
• Decline in market value and stakeholder confidence: Behavioral violations and poor standards lead to the company being perceived as unattractive by investors and stakeholders.

Embedding Ethics into Governance Strategy

To make ethics a stable component of corporate governance, a structured and conscious approach must be adopted. First and foremost, ethics must be an integral part of strategic planning: decisions must consider not only economic factors but also the impact on people, the environment, and communities.

Establishing ethical performance indicators (KPIs) enables progress to be monitored, and internal audits, supported by independent assessments, help identify critical issues and inform policy and practice improvements.

Finally, fostering a culture of responsibility and continuous ethical improvement is crucial to making ethics a distinctive feature of governance.

FAQs

What is the connection between corporate governance and ethics?

Ethics is the set of principles that guide governance to guarantee that everyday business decisions are fair, equitable, and transparent.

How can ethics be enforced in corporate governance?

Through codes of conduct, training programs, whistleblower systems, and constant board oversight of internal business processes.

Why is transparency important to ethics in governance?

Transparency fosters trust with stakeholders, enabling them to assess corporate behavior.

What role do shareholders play in corporate ethics?

Shareholders can hold executives accountable for misconduct and propose changes to business ethics.

Can ethical governance improve company performance?

Yes. Ethical behavior improves reputation and creates long-term business value.

References

Aguilera, R. V., & Jackson, G. (2003). The cross-national diversity of corporate governance: Dimensions and determinants. Academy of Management Review, 28(3), 447–465 https://doi.org/10.5465/amr.2003.10196772Wikipedia+1Wikipedia+1

American Psychological Association. (2017). Ethical principles of psychologists and code of conduct. https://www.apa.org/ethics/codeinfonetica.net+1Wikipedia+1

Cadbury Committee. (1992). Report of the Committee on the Financial Aspects of Corporate Governance (Cadbury Report). London: Gee Publishing.