Promoting Ethical Corporate Governance

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25-Jun-2024 | Annie Pruthi

Before we understand what is ethical Corporate Governance and why it is imperative, it is first important to understand the meaning of Corporate Governance. Corporate Governance refers to the system of rules, policies, practices, or guidelines that govern how a company is run. It includes the procedures that hold companies as well as their stakeholders accountable and responsible. Through Corporate Governance, it is possible to balance the various interests of many stakeholders involved. This would include the interests of shareholders, customers, government and others. Through Corporate Governance, transparency, integrity and accountability of the company are ensured and it is seen that the company operates smoothly and ethically.

Principles of Corporate Governance

Ensuring Accountability: Corporate governance cannot be ethical without ensuring that accountability is established. Be it the board of directors or the management, they must remain accountable to the various stakeholders involved. For this purpose, clear guidelines should be laid and followed to fix the accountability of those who make decisions.
Being Transparent: Transparency is one of the key principles to ensure good governance, in the case of government or companies or otherwise. Transparency is important to build trust among stakeholders of the company. This can be done only by providing accurate information regarding various decisions made by the company, especially regarding their financial performance.
Being Responsible: While this may seem a general principle to state, it is extremely important that responsibility is fixed and met by those in charge. On the part of the companies concerned, it is important that any organisation, public or private adheres to rules and regulations and follows the laws as a part of their responsibility. It includes making sure that the compliances are followed and ethical guidelines strictly guide the behaviour of everyone, right from the Board of Directors to the company's employees.
Impartial Conduct: Especially regarding the Board of Directors, impartiality must be followed as a thumb rule. Each decision taken by the top leadership should be with a sense of awareness and impartial conduct. Personal agendas or any beliefs should not come in between when making decisions.
Risk Management: For a company to detect, evaluate, and reduce risks that could affect its ability to meet its goals, effective risk management is crucial. This principle entails creating a strong framework for risk management that is included in the overall strategy and operations of the companies. Through the adoption of suitable controls and routine risk assessments, the management of risk can be ensured.
Integrity: Integrity and moral behaviour are essential components of sound company governance. It is expected of businesses to maintain high moral standards and promote an honest and ethical culture. This includes encouraging moral behaviour at all organisational levels and establishing a code of ethics that specifies appropriate behaviour and decision-making procedures.

Structure through which Corporate Governance is ensured

Board of Directors:

Board of Directors are elected members that form the governing body of any public company. These members are chosen by the shareholders of the company. Among many responsibilities, the primary responsibility of the Board of Directors is to set the strategy for a firm, supervise the management and defend the interests of the stakeholders involved. The major decisions such as mergers, acquisitions etc., are taken by the Board of Directors. Furthermore, they oversee the performance of a company and its management.

The composition of the Board of Directors includes the Executive Directors, Non-Executive Directors, and Independent Directors. Executive directors are those members who are part of the management team of the company, like the CEO and CFO while non-executive directors are the members who provide independent oversight since they are not a part of the company's routine operations. Independent directors do not have any relationship with the company, whatsoever. This ensures that they are impartial and fair in their decision-making.

Internal Auditors:

Internal auditors are responsible for ensuring the effectiveness of the various internal controls of a company and to overlook the risk management strategies. They are responsible for making sure that the company follows the regulations and ensuring that the various laws, rules and regulations are being followed. Internal auditors also overlook the compliance of various internal policies of the company and are tasked with providing their report findings to the Board of Directors.

External Auditors:

External auditors are of extreme significance since they are the ones to conduct audits of the financial statements of the company concerned and make sure that the company complies with the set accounting standards. Their opinion is important to determine the ‘financial health’ of a company. External auditors also check that the company follows the financial reporting requirements and adheres to standards. They also check for any errors or frauds through the financial statements. External auditors are “external” since they are independent members who are not a part of the companies they audit. Similar to internal auditors, they report their findings to the audit committee.

Four P's of Corporate Governance

The simplest way to understand the essence of Corporate Governance is to understand the four P's- People, Purpose, Process, and Performance.

People: The first P stands for people. This is concerned with the positions and duties that different members of the company have, especially the executives, the management, the Board of Directors and the employees. For effective corporate governance, it's imperative to select appropriate personnel processing a range of talents, and experience, and having integrity. To enable individuals to positively impact the company's governance structure and align their behaviour with the objective and moral standards, they must receive ongoing training and development, have well-defined roles, and exhibit strong leadership.
Purpose: The second P stands for “Purpose”. It refers to the goals, visions and essential principles of the company. It outlines the company's mission, its strategic objectives and how it plans to accomplish them while taking into account the interests of many stakeholders. A well-defined and effectively conveyed purpose aids in coordinating the actions and decisions taken by BoD, managers and employees with the company's ethical standards and long-term goals. Every person involved in the company and every process that is established has to work for a certain purpose.
Process: For ethical corporate governance, processes are of extreme significance. It refers to the policies and guidelines put in place to lead and manage an organisation or a company. This involves putting procedures, guidelines and frameworks in place to guarantee that decisions are transparent, consistent, and in line with the goals of the company. Internal controls, risk management, financial reporting and adherence to legal and regulatory obligations are important aspects. Companies may guarantee efficiency, lower the risk of error and improve accountability by standardising these procedures. To remain relevant and successful in the changing circumstances, these procedures must undergo routine audits and reviews. The processes can only get better with time and with constant analysis.
Performance: Performance stands for due assessment and quantification of the financial and operational outcomes of the company. It entails establishing precise goals, tracking advancements on the set goals, and evaluating how well governance procedures contribute to these ends. This principle makes sure that the company complies with the legal as well as ethical criteria in addition to meeting the financial goals. Financial performance, customer happiness, staff involvement and sustainable practices are examples of some performance measures.

Why is Ethical Corporate Governance Crucial?

It goes without saying that ethical corporate governance is crucial and should be promoted. It builds confidence and trust among all parties involved, such as consumers, employees, investors, stakeholders and the larger community. The use of transparent and accountable governance systems serves to ensure that the company works with full integrity and reduces the potential for financial irregularities and misbehaviour. To draw and hold talent, investment and customer loyalty- all of which are crucial to the long-term health and profitability of the business and company- this trust is needed.

Ethical corporate governance can be promoted through various sustainable business practices. This famously includes Corporate Social Responsibility (CSR) which improves the company's long-term viability and its standing. CSR programmes show that a business is dedicated to fulfilling its social as well as environmental obligations in addition to its financial goals. Companies strengthen their relationship with stakeholders by attending to the needs and concerns of the community and the environment. This also boosts and positively contributes to the reputation of the company concerned. Furthermore, ethical corporate governance that is in line with CSR ideals encourages the production of long-term value.

The emphasis put by a company on its social responsibility and ethical behaviour showcases its commitment to the various principles put forward and claimed by it. Through a high priority on ethical corporate governance, it is better able to deal with the changing laws and cultural norms. This not only shields the companies from various financial penalties or legal repercussions but also, such proactive strategies make sure that the company creates a social impact in a positive direction and meets its responsibility ethically.

It can further be promoted by establishing a code of ethics. A code of ethics helps in regulating the company's employees as well as keeping a check on the legal requirements. In addition, the independence of the Board of Directors has to be ensured and strengthened. Diversity within the members of the board of directors allows that all viewpoints are duly considered and heard before decisions are made.

A company should also have whistleblower protections in place. This would help in providing the various employees or stakeholders or anyone with information in regard to any unethical behaviour or violations, to be reported in time and provide an opportunity to investigate any such errors. Through various compulsory training programs, ethics can be cultivated within the organisation and the ‘people’ component of corporate governance can become aware and educated. This will foster a culture of open communication, and ensure accountability as well as transparency.

Conclusion

Ethical corporate governance is crucial to ensure accountability, responsibility, integrity and provides transparency in regard to the company's conduct and its operations. It keeps stakeholders informed, helps to prevent any non-compliance, mitigates risks in due time and fosters a sustainable environment for all the stakeholders involved. Without the adoption of ethical practices and governance procedures, it's not possible to attain the long-term goals of any company and to positively impact the larger society.

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