Ethics in Corporate Governance
Corporate Governance is the Body (Structure, Rules, Boards). Business Ethics is the Soul (Values, Intent, Culture).
You cannot have good governance without ethics. You can follow every rule (Compliance) and still destroy the company (e.g., Enron followed accounting rules creatively).
Concept
Ethics in governance means the Board of Directors acts as Fiduciaries (Trustees) for the shareholders and stakeholders.
- Legal Duty: Duty of Care, Duty of Loyalty.
- Ethical Duty: Duty of Fairness, Duty of Transparency.
Scope of Ethics in Governance
1. Boardroom Ethics
- Independent Directors speaking up against the Review.
- Not rubber-stamping the CEO's excessive salary.
- Declaring conflicts of interest.
2. Financial Reporting
- Presenting a "True and Fair view" of accounts.
- Unethical: "Window Dressing" (making accounts look better than they are) right before a loan application.
3. Treatment of Minority Shareholders
- Majority shareholders (Founders/Promoters) should not loot the company at the expense of small retail investors.
Note
Letter vs Spirit:
- Letter of Law: "I didn't break the specific rule written on page 45."
- Spirit of Law: "I upheld the intent of the law."
- Ethical Governance focuses on the Spirit.
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