Ethics and Governance: An Introduction to Moral Principles
This is ethics Introduction essay where this topic will be considered. To start with, ethics is the philosophy of being a good person, doing what is right, living well with other being and desiring only that is right in life. Solomon also discussed that ethics is a system of values and principles and not just a set of do’s and don’ts. Once we translate ethics into the business world, we refer to it as business ethics which directly refers to applying ethical values to conduct businesses. Ethics derived from three theories, namely consequentialism, dignity and contractualism which specify how individuals regard as ethics.
On the contrary, corporate governance is “the direction, management and control of an organization” which depicts the way organizations are directed and controlled effectively. Corporate governance is primarily concerned with how businesses should be best managed to achieve its objectives and in the best interest of stakeholders and shareholders. James Wolfensohn, the Ninth President of the World Bank, stated that “ Corporate governance is about promoting corporate fairness, transparency and accountability'. Closer to home, according to the Malaysia Code of Corporate Governance by the Securities Commission of Malaysia “Corporate governance provides a framework of control mechanisms that support the company in achieving its goals, while preventing unwanted conflicts. The pillars of corporate governance such as ethical behaviour, accountability, transparency and sustainability are important to the governance of companies and stewardship of investors’ capital. Companies that embrace these principles are more likely to produce long- term value than those that are lacking in one or all”.
The Relationship Between Ethics and Corporate Governance
Business ethics give people the tools to deal with moral complexity in business whilst corporate governance is the ownership, control and accountability of the business entity. In local research, Zaleha, Rashidah & Faridahwati found the three themes on the role of ethics in corporate governance, namely, “corporate governance is a code of ethics, corporate governance is inclusive of ethics, and ethics is an affiliate of corporate governance”. In this regards, it can be deduced that ethics refer to moral values while corporate governance is the codes of conduct. In summary, ethics is a subset of corporate governance .
Code of Ethics and the Code of Governance
We often hear the term “code of ethics” or “code of governance”, which should be distinguished distinctly to ensure its demarcation. Relating to their roots, ethics and corporate governance, Code of Ethics is a “value-based” guidelines while Code of Governance is “rules-based”. Both offer a solution to every possible situation and provide parameter on how to react to them. Despite that, organizations and agencies are developing codes composed of both ethics and governance that spelled out the ethics, principles, shared values and culture of their organizations. Usually, these combined codes are generally termed as Code of Conduct. Some of the examples of popular code of conducts are Amazon’s Code of Business Conducts and Ethics and Google’s Code of Conduct . The Prime Minister’s Department of Malaysia also has its own Code of Conduct Ethics to be observed by all the personnel in the department.
There is five code of ethics and governance that will be discussed in this assignment which are responsibility and accountability, transparency, compliance, diversity, and integrity.
Responsibility and accountability
In the sphere of ethics and governance, the two core elements of responsibility and accountability are often used interchangeably. The two are different but somewhat intertwined and has become a swing of the pendulum from one to the other.
According to Ieraci described responsibility as the actions, or bestowed upon an individual whilst accountability relates to being liable on one’s actions. In another research, a scholar termed “responsibility means to be responsible for an act one undertakes, while accountability simply means to be called to account”.
In his research on responsibility and accountability, Bivins first summarised responsibility as “a bundle of obligations associated with a job or function”. Then, the author construed accountability as the person who can be held accountable for an action or the results of that action. For this assignment, the definition of responsibility and accountability from Ieraci will be used which stipulated responsibility as the actions or doings whilst accountability is the person answerable for the actions.
Personal Responsibility
When responsibility coalesces with employees, it became personal responsibility which refers to the obligations that an employee towards its employer.
Petty & Hill researched on identifying personal responsibility amongst workers and segregated it into three areas namely (1) interpersonal skills, (2) initiative and (3) being dependable. In the interpersonal area, the responsibility of the workers includes practicing courtesy, cheerful, friendly and considerate. In the area of the initiative, some the responsible behaviour of workers is being productive, enthusiastic, dedicated, conscientious, orderly, preserving and adaptable. On being dependable, the responsibilities include reliable, careful, honest and punctual. Some of the irresponsible behaviour at work include malingering, taking long lunch breaks, abusing expense accounts, breaches of health and safety legislation, price-fixing, exploitation of staff, stealing and bribery. On another note, the authors also mentioned the tendency for workers to use company’s facilities for private purposes such as making personal phone calls, photocopying personal documents, using the Internet for private purposes and taking company equipment.
Accountability
Some of the examples of accountability in the workplace include employees present at their workstation throughout their shifts, complete tasks that have been assigned to them, doing the right thing in the aspect of their work; follow the standards operating procedures and work towards realizing the company’s goals. If the employees failed to fulfill their functions and what is expected of them, then, they will have to be answerable and deal with the repercussions.
In Malaysia, carrying responsible behaviours and being accountable is vital for the civil servants and professionals such as accountants, lawyers and doctors. The Prime Minister of Malaysia informed all civil servants in Malaysia to be responsible, impartial and to say no to corruption. In the last year or so, Malaysia has experienced the termination of a few prominent officials in the civil service due to corruptions.
Transparency
Corporate Transparency is the availability of firm-specific information to those outside publicly traded firms. Transparency is needed wherever the power is exercised. Transparency and corporate governance are connected symbiotically, as one will grow with the other, hence, when corporate governance improved it will elevate the level of transparency and vice versa. Increased transparency can result in better resource-allocation decisions through decreased corruption and increased trust in these organisations. Two transparency policies shall be discussed in this paper are (i) open-door communication policy (ii) Related-party transactions
Open-Door Communication policy (Free Access)
Open-door communication policy or free access is implemented through encouraging the employees to share their pent-up grievances by means of friendly, informal, and confidential talks with the supervisors of their choice at all levels of management hierarchy. Hewlett-Packard (HP) is one of the examples of corporate with successful open-door communication policy, where HP refers to it as “Management by Wandering Around” (MBWA). Some of MBWA practices encourage managers at all levels to spend a part of each day wandering through the organizations, regular common coffee-breaks and common spaces for mingling. All these practices are meant to reinforce the sense of common purpose and belonging as well as to widen each employee’s sources of information.
Related-party transactions
Transactions between a firm and its own managers, directors, principal owners or affiliates are known as related party transactions. Gordon, Henry & Palia discussed two alternative views of related party transactions where one view is that they are conflicts of interest; or the contrary, they are viewed as genuine and fair transactions. Hence, it is important to have a clear policy or internal regulation to guide such transactions. By declaring related party transactions openly, it allows regulators, market participants, and other corporate stakeholders to monitor the corporate governance and the economic consequences caused by such transactions.
Compliance
Compliance is defined as a rule which covers specification, policy, standard or law. Regulatory compliance refers to the objectives that the organisations aspired to achieve to ensure that they have taken steps and effort to comply with all relevant laws, policies, procedures and regulations.With the development of new and/or revised regulations and the needs for operational transparency, organisations are now escalating their adoption level with the used of consolidated and harmonised sets of compliance controls.
Environmental Well-Being
United Nations issued a document “United Nations Framework Convention on Climate Change” indicates the social and environmental impact of climate change, resource depletion and biodiversity loss becoming more obvious. Corporations need to make a commitment through establishing a framework to address these challenges within their operations and to contribute throughout the lifecycle of their products and addressing them within the larger community.
Diversity
According to Robbins, workforce diversity has important implications for management practices and policies. Frequently, diversity is viewed in a limited fashion, primarily addressing issues of race or gender differences, and linked to the laws providing protected status to certain groups. However, recent studies were done by Dike, diversity can be classified into two categories:
- The first which is the primary category are such as race, age, gender, sexual orientation and physical attributes which exhibits the main differences between various individuals and has the most impact on initial encounters and can be easily noticed and serve as filters through which people view the world.
- The second category is culture, religion, education, geographical location, income, community, social status and position are those qualities that may not be noticeable during the first encounter in the first category. This category can change during different interactions by the individuals involved.
Having briefly explained the various category of diversity, a few researchers have suggested that if diversity is being adopted in an organization it can benefits the organization. According to his research, there are 7 benefits in ensuring diversity are being practiced in an organization. The author also quoted a report by McKinsey that a diverse executive board generates better returns.
In other words, if a company practices equal employment opportunity, the company could have a broader approach in its business model. A diversified workforce in the airline and hospitality industry certainly gives better publicity and turnover compares to one that does not. In those industries, their customers are from a diverse background. A diverse workforce will have a better advantage to address any cultural and language barrier by getting the right person to address the problems.
In our current judicial system, only the presiding judge (only one judge at the session and high court level) will be making the judgement on any given case. However, if the jury systems are being brought back to the current justice system, a diverse team would surely cover more angles and being able to deliberate a better judgement. Again, the public will have better confidence over such arrangements because of equal opportunity are given to different ethnicity and gender. Hence, lesser grouses from the public.
When diversity is not managed properly, there will be a potential for higher turnover, difficult in communication and interpersonal conflicts. Overall, it will be adversarial to the organization’s performance, profitability and reputation.
Integrity
Integrity is defined as the consistency of actions, values, measures, principles, belief, expectations, and outcomes. Integrity is referred to honesty and truthfulness or accuracy of one’s actions.” Montefiore & Vines concluded the meanings of the Latin “integras” as intact, whole, harmony, with integrity regarded as “wholeness” of consistency and coherence of beliefs and values such as incorruptibility; honesty; impartiality; accountability. To uphold integrity, the company should adopt whistleblowing policy, no gift policy and code of conduct. In addition, separation of power between chairman and CEO will also ensure check and balance mechanism is well in place to avoid power abuse and conflict of interest.
Whistleblowing policy
Whistleblowing policy provides reporting channels for employees and external parties to report any suspected corruption, criminal activity or fraud in the workplace while maintaining the confidentiality of the whistle-blower to ensure no adverse consequences such as retaliation on the whistle-blower.
For example, Maybank has a clear whistle-blower policy statement. It highlights its objectives and Maybank‘s core values (T.I.G.E.R) where “I” is the Integrity. It covers the scope of reporting on misconduct and criminal offense types such as bribery, conflict of interest and potential abuse of position for personal gains. The reporting channels such as e-mail or toll-free number, the content of disclosure guideline, non-disclosure and protection to the whistle-blower are also clearly stated.
No Gift Policy
No Gift Policy applies to all employees and directors to avoid conflict of interest and uphold integrity. Gifts from external parties which have the potential or ongoing business dealings with the company may be seen as bribery that will tarnish company reputation or violate anti-bribery laws.
For example, Petronas has No Gift Policy to all employees and directors and their family members. The policy has clear information on Do's and Don’ts with stipulated some exceptional cases. The gift from external parties must be returned with an explanation note on Petronas’s No Gift Policy. In the event when refusing gift might severe business relationship, employees must record the gift in Petronas‘s gift register and decide the proper treatment of the gift such as a donation to a charity.
Separation of Power Between Chairman and CEO
Separate power between chairman and CEO is important to strengthen the overall integrity of the company and its board’s independence. When the CEO is also the chairman of the board, there is a clear conflict of interest because the board is responsible to monitor corporate governance through a management-free audit committee report. They also decide the CEO’s remuneration package and monitor how the CEO runs the company according to its mandate and shareholder wishes.
A board led by an independent chairman is more likely to identify and monitor areas of the company that deviates from its mandate and takes corrective measures to get management back on track. It creates an effective check and balance mechanism to prevent abuse of power by the CEO and undermine board independence and its effectiveness. For example, Chairman of Maybank is Datuk Mohaiyani Shamsudin while CEO is Datuk Abdul Farid Alias.
Conclusion
By the turn of the decade towards 2020, business establishments and corporations were flooded with stacks of guidelines and code of conducts. Some were established as laws whilst others as regulations. Companies no longer shy away from ethics and corporate governance, rather, embrace them in their objectives and formulate their sets of responsible business strategies. To ensure business sustainability, companies should gauge their corporate’s compliance risk.
Compliance risk is the current and prospective risk to earnings or capital arising from violations of, or nonconformance with, laws, rules, regulations, prescribed practices, internal policies, and procedures, or ethical standards. Compliance risk also arises in situations where the laws or rules governing certain products or activities of the organisation’s clients may be ambiguous or untested. This risk exposes the institution to fines, civil money penalties, payment of damages, and the voiding of contracts. Compliance risk can lead to a diminished reputation, reduced franchise value, limited business opportunities, reduced expansion potential, and an inability to enforce contracts.
Strong financial results are no longer sufficient to meet the stakeholders’ expectations. They are expecting more on non-financial results and other intangibles to ensure financial growth. The intangibles would be increased reporting, transparency and insights into an organisation’s strategy, risks and operations that includes the understanding of the way the business is conducted. Governance, Risk Management, and Compliance (GRC) management capability shall be the solution to address the increase of stakeholder expectations. With the quality movement from the mid-1980s to early 1990s, the stakeholders' demand is becoming more baseline expectations.
Compliance and ethical practices must be viewed as upmost important and be part of the organisation to keep the organisation from violating the country laws. It must become part of the overall business planning and operations, applicable throughout the entire organization. Conclusively, adopting this unified approach will give the organisation the edge in overall performance and compliance will place less stress on to the business.
We compose our final thoughts on this topic of ethics and corporate governance in the country with the heightened awareness of corruptions and distrust of the previous Malaysian’s Government. There were numerous appalling abuses and high profile indictment. It is obvious that the current Government are carrying out their duties cautiously in line with the current stipulated governance.
The commitment towards the ideal, virtuous actions that indicate a high value of ethics and corporate governance are vital, not only towards companies and the Government but to us. Moving forward, we all should practice ethical governance to ensure businesses operate efficiently, thus, driving the economic growth in the country.
