Business Ethics and Corporate Governance: Principles for Responsible Leadership

Corporate scandals can damage a company’s bottom line and, in severe cases, put it out of business completely. A scandal can involve financial crimes, ethical misconduct, environmental concerns or poor employee treatment. To help prevent against the fallouts that usually follow a scandal, business ethics and corporate governance establish organizational values and set standards for decisions and behaviors.¹

Strong, clearly established and properly communicated ethical standards build trust with partners, stakeholders and customers. These days, there's heightened scrutiny against corporations and how they choose to do business, and customers expect companies to share more information with the public. Consumers are more likely to buy from businesses that reflect their values, with 88% reporting they prioritize buying products that are ethically sourced.² Many consumers also expect the companies they support to promote charitable causes, offer fair wages and speak out against social issues. A mission statement or set of values is a great way for an organization to communicate its ethical standards and corporate culture.

This article will examine responsible business conduct and corporate governance principles and how they guide ethical decision-making.

Foundations of Business Ethics

The specifics of an organization’s business ethics guidelines will vary depending on the industry and type of business. However, many ethical business practices fall under one of the following principles:³

• Integrity: Being honest in all aspects of business
• Transparency: Sharing openly about how business is conducted and how any ethical concerns are handled
• Fairness: Treating all stakeholders, customers and employees equally without discrimination
• Regulatory compliance: Following all applicable laws and regulations
• Human rights: Committing to treating every human being with dignity and respect
• Responsibility and sustainability: Considering and being accountable for how business practices affect society and the environment

Corporate Governance Framework

To ensure that all employees abide by the values that executives have agreed upon, a company will usually establish a corporate governance framework. A corporate governance framework is a set of rules, practices and processes that guide how a corporation operates. It includes decision-making structures and the mechanisms a company uses to guarantee accountability, fairness and business transparency.⁴ The framework is usually managed and enforced by corporate officers.

A good corporate governance framework balances a company’s business operations with its obligations to shareholders, employees, customers and society. It establishes the roles and responsibilities of key players in the organization, such as the board of directors, managers, shareholders and other various stakeholders.⁴

Ethical Leadership in Organizations

Adhering to the ethical standards outlined in a corporate governance policy begins with ethical leadership. Leaders can impact all areas of business success and serve as role models for how other employees should act. They create a positive culture that helps attract and retain top talent. Companies with ethical leaders are also more likely to attract investors and build positive relationships with customers, which is key for long-term success.⁵

Here are some steps businesses can take to encourage ethical practices at all levels:⁵

• Leaders should demonstrate the qualities they want to encourage, including fairness, honesty and respect
• Leaders should establish clear standards and values that are regularly communicated and celebrated throughout the organization
• Leaders must train employees in general industry ethics and the ethical responsibilities associated with their roles

Codes of Ethics and Compliance

A code of ethics documents a company’s ethical guidelines and outlines best practices for complying with laws and corporate standards. Many professions have a code of ethics that practitioners must follow, even if they don't deal in an industry that presents many ethical dilemmas.⁶ A business may have a compliance-based code of ethics, a values-based code of ethics or a combination of both.

Values-Based Code of Ethics

A values-based code of ethics primarily deals with a company’s internal values. It focuses on core values that reflect the organization’s fundamental beliefs and sets high standards for what the organization stands for, much like a moral code. A values-based code also encourages a company's employees to think critically and make decisions that uphold the organization’s values, even in situations not explicitly covered by company policies or laws.⁶

Compliance-Based Code of Ethics

A compliance-based code of ethics is rules-focused and specifically outlines employee conduct and the penalties for violations. Compliance-based codes are often grounded in legal requirements and industry regulations, and they focus on regulatory compliance as a primary means of maintaining ethical behavior and standards.⁶

Professional Code of Ethics

Professionals in some fields, such as medicine or finance, must follow a professional code of ethics. These codes are grounded in fundamental ethical principles relevant to the specific profession, such as confidentiality, objectivity, competence, fairness and integrity.⁶ There can be severe consequences for violating a professional code of ethics, so these professionals are usually heavily trained in and tested on their understanding of the code.

Corporate Social Responsibility (CSR)

Corporate social responsibility (CSR) is a voluntary set of guidelines that cover how a company will make a positive environmental and social impact. CSR can be implemented in many different ways depending on the primary values of a company. An effective CSR policy must be genuine and integrated throughout a business’s culture and daily operations.⁷

Many companies focus their CSR policies in the areas of environmental sustainability, philanthropy, volunteering and fair labor practices. The most successful CSR initiatives are long-term and related to core business activities.⁷ Some examples of companies who exercise corporate responsibility are Tom's (donating shoes for every pair bought, now focused on grassroots campaigns), Coca Cola (making their packaging 100% recyclable) and Lego (creating its toys from sustainably sourced materials).

Ethical Challenges in a Global Context

When companies do business in a global market, whether they’re expanding their operations or foreign markets are a part of their supply chain, they often run into ethical challenges. One reason it can be cheaper to do business overseas is because there is sometimes a lack of environmental regulations. Other nations may also allow exploitative labor practices and engage in human rights violations.⁸

Modern businesses that embody corporate accountability have to voluntarily maintain their ethical standards while doing business in global markets that have widely varying laws. For some businesses, this means applying the same standards across the board, such as offering the same compensation package for employees in the same role regardless of location. Others offer different compensation packages but try to ensure they’re comparable based on the local economy.⁸

Future Trends in Business Ethics and Governance

Corporate governance and business ethics change to reflect laws, markets and societal expectations. While the foundational principles of ethical behavior don’t change, the specifics evolve. Artificial intelligence (AI) is one area that is transforming business and will significantly impact areas of corporate governance. Businesses can use digital sensors and tools for more effective communication and data analytics, and to drive ethical decision-making.⁹

Other emerging trends in business ethics case studies include board diversity and inclusion to represent and benefit a broader section of society in corporate governance. In a similar vein, stakeholder capitalism is where companies consider stakeholder management beyond shareholders. In stakeholder capitalism, businesses focus on the interests of employees, suppliers, customers and society instead of just the interests of shareholders.⁹

Advance Your Career With Yeshiva University

Today's business leaders will enhance their organization's success if they lead from the top down in business ethics and corporate governance. By demonstrating strong ethical behavior, establishing clear guiding principles, and making employees and customers feel like they're part of something that's bettering the world, they can garner more widespread support and affinity for their company.

Yeshiva University’s online MBA will equip you with the skills you need to become a business leader in today’s complex, global marketplace. You’ll gain essential business knowledge such as financial management and business analytics as well as entrepreneurship and the soft skills that will help you advance your career. Contact one of our admissions outreach advisors today to learn more.