Just imagine this for a second. You are a CEO, top manager, board member, or compliance officer. You are asked to do a ‘small favor’ and receive an enticing payoff. What can stop you from doing the favor?
Well, it’s your moral compass, which is the ability to distinguish right from wrong and stick with the former. In essence, you need ethics and integrity, which are vital fundamentals for good governance.
As a corporate leader, you should understand and embrace ethics and integrity in corporate governance. Sadly, not many do it. According to an EY Global Integrity Report 2024, at least 21% of organizations have suffered a major integrity incident over the last two years.
That’s not all. Since 2014, companies have incurred penalties amounting to $1 trillion for corporate violations in the United States and the U.K. alone.
What’s even more depressing is how far corporate leaders are willing to go to advance their interests. The report shows that 67% of board members wouldn’t mind acting unethically as long as it benefits them, and 65% of them don’t feel the pressure to report unethical misconduct,
Moreover, 54% of employees don’t understand compliance policies, which is also quite sad. On the flip side, a company known to uphold high ethical standards and integrity earns investors’ trust, loyalty of employees, and satisfaction of customers, and nothing matters more than keeping all three parties happy.
It’s, however, essential to understand the two terms. Yes, the terms’ ethics’ and ‘integrity’ are related and almost inseparable. But even so, they are different and founded on different principles.
This guide will help you differentiate them, understand their roles in corporate governance, and learn their best practices. Let’s dive in!
Key Takeaway:
- Ethics describes the moral principles that govern how people behave or conduct themselves, while integrity is an attribute of having strong moral principles or being naturally honest.
- Ethics are integral to corporate governance as they help with investor confidence, employee engagement, business integrity, cost engineering, customer loyalty, competitive advantage, corporate image enhancement, budget management, power brokering, and long-term sustainability.
- Financial fraud, corruption, bribery, conflict of interest, and false advertisement are common unethical governance practices.
- The success of ethical governance depends on practices like fair employment, risk awareness, a code of conduct, ethics education, data protection, diversity and inclusion, and whistleblower protection.
- Corporate integrity is vital in trust building, ethical leadership, favorable publicity, enhanced job satisfaction, and improved performance.
- Key indicators of corporate integrity include ethical leadership, stakeholder trust, workers’ engagement, risk management compliance, and social responsibility.
What are Ethics in a Corporate Setting?
According to the Oxford Advanced Learners Dictionary, ethics are the “moral principles that influence a person’s behaviors.” In a corporate sense, ethics are the guiding principles that allow employees to work and behave morally uprightly.
Meanwhile, ethical corporate governance is the system by which a company is run and controlled. It includes the moral behaviors of its workers and the ethical implications of the company’s involvement in the community.
What’s the Role of Ethics in Corporate Governance?
Ethics are a fundamental aspect of corporate governance. Exemplary ethical conduct builds good governance. Below are the roles that ethics play in corporate governance:
a) Investor Confidence
Ethical practices inspire confidence in stakeholders. Investors, in particular, find it easy to support corporate leadership, especially the board of directors, with its ventures. Investors become believers in what the company leadership stands for and its direction for the company.
b) Employee Engagement
It’s not just the investors who buy into the company’s values and guiding principles. The employees also do that. They trust the leadership more, which engages them on various fronts, considers their views, and addresses their concerns.
c) Business Integrity
Ethics are an essential pillar for promoting integrity in the workplace. They encourage accountability and transparency, which are vital to weeding out unethical practices like financial fraud, conflict of interest, and corruption.
Moreover, ethical standards ensure fair treatment for all stakeholders and promote ethical leadership, which boosts business integrity.
d) Cost Engineering
Cost engineering is the use of scientific techniques and scientific guiding principles to solve issues with cost estimation, budgeting, cost control, profitability analysis, and project management.
Ethical decision-making is essential for success. Moreover, cost engineers must be guided by ethical values to offer the right perspective when cost engineering.
e) Customer Loyalty
Ethics build customer loyalty. Customers find it easy to trust and continue dealing with an organization that upholds its moral standards, has zero tolerance for unethical practices, treats its employees fairly, and is active in its CSR (Corporate Social Responsibility) engagements.
f) Competitive Advantage
Consumers are increasingly aware of ethical corporate practices and prefer businesses that align with them. Companies founded on strong moral values find it easy to outcompete their compatriots with a weak ethical foundation, leading to better sales.
g) Corporate Image Enhancement
The company’s corporate image improves once there is investor confidence, employee engagement, customer loyalty, and business integrity. Most people learn about the brand and its products and services, even without too much advertising.
h) Budget Management
Ethical conduct plays a pivotal role in managing companies’ budgets. It ensures transparency in financial reporting, accountability during auditing, and fairness during resource allocation. It makes it easy for stakeholders not to question the integrity of the financial information available to them.
i) Power Brokering
It takes an excellent reputation to strike a good business deal, and the success of such deals is higher when the company is known to uphold high ethical standards. Ethics inspire trust during power brokering. They paint an image of transparency and exemplary leadership, which are fundamental for power brokering.
j) Long-Term Sustainability
Solid ethical standards lay the correct foundation for corporate success in the long term. Everyone works hard to uphold the company’s moral values, and the more their actions coincide with societal values, the more the company thrives.
Unethical Governance Practices and Examples
Unethical governance conducts come in different forms. Below are the most typical types of ethical lapses and notable examples:
1. Financial Fraud
Financial fraud takes different forms. It could involve deception or deliberate misrepresentation of financial information, hiding liabilities, or inflating revenues. Sadly, many firms have fallen victim to financial fraud and suffered severely.
In 2002, for example, Denmark’s largest bank, Danske Bank, was accused of financial fraud. The financial powerhouse forfeited USD 2 billion as a penalty upon pleading guilty.
2. Corruption and Bribery
Most companies (or corporate leaders) engage in corruption and bribery to gain financial favor or any other advantage. This compromises their ethical standing and integrity, ultimately ruining their image.
In 2016, for example, a data breach in Uber’s system led to the loss of valuable data, affecting over 25 million customers. Instead of coming clean about the hacking, Uber resorted to paying off the affected customers $100,000 each. Moreover, they let go of the CEO after paying him $148 million.
What if Uber had come clean about it? They probably wouldn’t have parted with such humongous amounts of money or even fired the CEO, and more importantly, they would have retained customer loyalty to some extent. Now, they must compete with Lyft, Cabify, Bolt, and other giant ride-sharing services.
3. Conflict of Interest
Conflict of interest cases are rampant in the corporate world, where corporate leaders put their interests before those of the company or stakeholders. This results in unethical practices like awarding contracts to unqualified individuals or insider trading.
Insider trading occurs when a few board members trade company stocks based on non-public information. It is considered unethical because it undermines investors’ trust and market integrity.
Board members who engage in insider trading are judged to have gained an unfair advantage over others. In 2022, a former US congressman from Indiana and several others were charged with insider trading.
4. False Advertisement
Consumers have the right to truthful advertisements. When an ad is false, perhaps with an untrue or overhyped claim, it amounts to unethical practice, which is punishable by law.
In 2015, automotive giant Volkswagen was involved in a major scandal. It was accused of cheating emission tests through software installation. As a result, the automaker was forced to cater to liabilities amounting to $14.7 billion, which is a monstrous amount.
Best Ethical Practices for Good Governance
For good governance, these ethical practices are worth implementing by companies:
1. Fair Employment
Fair compensation is a product of good ethical standards, while unfair compensation is unethical. Employees need to be compensated fairly for their jobs, considering their experience level, effort, prevailing wage rates, and the cost of living. It’s all ethical to do that!
2. Risk Awareness
Ethical frameworks also call for risk awareness, where the company identifies and takes measures to handle risks. Companies need to adopt the right risk mitigation plans and be able to assess the severity of the risks when they happen.
3. Code of Conduct
A code of conduct refers to guiding principles or values that enable an organization to conduct its affairs fairly, honestly, and responsibly. It ensures the company aligns its behaviors within socially acceptable frameworks.
Overall, the code of conduct should be documented and shared among employees. It should be based on principles like integrity, honesty, fairness, loyalty, and respect, especially respect for people and the rule of law.
4. Ethics Education
Documenting the code of conduct isn’t enough to promote ethical conduct in the workplace and the boardroom. Everyone needs to understand the importance of being guided by such principles, and that’s where ethics training is essential.
Through ethics education programs, employees can understand the various moral values and principles that the company stands for and work hard to uphold them.
5. Data Protection
Confidential company information needs to remain confidential. Information not meant for public consumption should not reach the public or competitors. If it does, it could be detrimental to the business’s survival.
Today, companies protect data by adopting high-level cybersecurity practices like firewalls and strong passwords. Others opt for access control encryption and authentication to keep hackers and other cyber threats away.
6. Diversity and Inclusion
It’s ethical when the board of directors is diverse and inclusive. It should comprise capable individuals of diverse backgrounds, ethnicities, races, and expertise. It’s also essential to include people living with disabilities, other minorities, marginalized groups, and women on the board, as their role in corporate governance is invaluable.
7. Whistleblower Protection
Whistleblowing is a fundamental provision for reporting unethical conduct within a corporate setting. However, many employees fear disclosing morally wrong actions because they fear retaliation.
Such employees need protection to report wrongdoings and feel safe and secure. This protection starts with confidentiality and possibly strict anti-retaliatory policies, allowing them to speak out freely when someone is acting unethically.
Examples of Good Ethical Governance
Just like we’ve had examples of unethical governance, we also have some excellent examples of ethical governance, which include the following:
a) Patagonia
Outdoor clothing brand Patagonia is known to be a chief advocate of environmental initiatives. It often encourages customers to repair and reuse its products rather than replace them. Its transparent communication and advertisement have been the bedrock of its sustainability efforts and corporate success.
b) Unilever
Consumer goods manufacturer Unilever is built on the foundations of good governance. Its sustainability efforts are apparent to everyone. For instance, its drive to reduce its environmental footprint focuses on reducing, recycling, and reusing. The aspect of recycling and reusing is evident in recyclable packaging materials.
c) Coca-Cola
Beverage powerhouse Coca-Cola has run the soft drink industry for generations. Its dominance and success are partly due to its strong ethical foundation and dedication to sustainability. Coca-Cola is known for promoting recyclable materials (which reduce waste) and social initiatives like clean water access and education programs.
d) Microsoft
Tech giant Microsoft is one of the most successful companies in the world and has been so for many years for a reason. That’s mainly owing to its unwavering commitment to ethical corporate practices and corporate social responsibility (CSR). Its commitment to reducing waste and using renewable energy has been vital in reducing its carbon footprint.
e) Salesforce
Cloud-based big-hitter salesforce has been successful for many reasons, including ethical governance. It’s hard to overlook its sustainability efforts, primarily its Net Zero Cloud tool. Net Zero Cloud is ESG software that enables companies to preside over their environmental, social, and governance initiatives and create transparent disclosure reports.
What’s Corporate Integrity?
The Oxford Advanced Learners Dictionary defines integrity as honesty or the possession of strong moral principles. It’s simply striving to do the right thing, not just when people are looking but equally when they aren’t.
Now, suppose we can apply it to our context. In that case, corporate integrity is defined as acting honorably, committing to doing what’s right, and upholding the highest moral standards in the workplace or when representing the organization one works for in any capacity.
Corporate integrity means bridging gaps between one’s intentions and possible actions to ensure the interactions with various stakeholders align with company values.
Importance of Corporate Integrity
Integrity is quite crucial for corporate governance as it contributes to the following:
- Trust Building: Corporate integrity builds trust among customers, investors, suppliers, employees, regulators, and other stakeholders.
- Ethical Leadership: Corporate integrity enables leaders to demonstrate appropriate conduct and uphold moral values inside and outside work hours.
- Favorable Publicity: Corporate integrity enables a company to be mentioned positively in the media, which improves its public image.
- Enhanced Job Satisfaction: A high level of job satisfaction indicates good governance and, more importantly, corporate integrity.
- Improved Performance: Corporate integrity means employees strive to do what’s right, which means doing their jobs to the best of their ability.
Key Indicators of Corporate Integrity
Corporate integrity is defined by several elements, which include the following:
a) Ethical Leadership
Ethical leadership is when business leaders conduct themselves appropriately and according to the company’s moral principles and values. It’s evident in words and actions. Leaders lead by example. They set the standards and point out wrongdoings without fear or favor.
Fundamental principles of ethical leadership include:
- Respect (corporate leaders accord everyone the respect and dignity due to them)
- Honesty (corporate leaders are truthful in all their corporate dealings)
- Accountability (corporate leaders are responsible for their actions)
- Equality (corporate leaders do not condone any form of discrimination)
- Stakeholder Trust (stakeholders trust corporate leaders)
- Compliance (corporate leaders demonstrate respect for the rule of law)
- Humane behavior (corporate leaders display humane qualities like empathy and compassion)
- Value-driven (corporate leaders create value for the business)
b) Workers’ Engagement
The level of employee engagement is another critical metric for measuring corporate integrity. The more engaged the employees are, the more the company values their well-being. Efforts like employee training, a supportive working environment, and fair compensation lead to better workers’ engagement and corporate governance.
c) Risk Management Compliance
The level of risk management compliance can also indicate corporate integrity. A company’s strong risk management culture can be seen in its compliance with regulations, its address of potential risks, and its policies.
d) Social Responsibility
Corporate organizations are responsible for supporting various community initiatives, diversity and inclusion, and sustainable practices. Giant companies like Coca-Cola, Unilever, and Microsoft are already doing that.
Embrace Ethics and Integrity in Corporate Governance Today!
Ethics and integrity are undeniably the building blocks of good governance. We at the Center for Corporate Governance advocate for this, and one way we demonstrate it is by offering training to corporate leaders. So far, we’ve trained over 17,000 corporate leaders ranging from CEOs and other top executives to the board of directors and council members.
Our client-tailored 5-day corporate governance training equips you with the best tools to navigate the complex corporate governance landscape. Through it, you get the opportunity to network with other corporate leaders, relish expert-led insights on corporate governance, and discover the best future-ready frameworks in corporate governance.
We invite you to check out this corporate governance program and unlock leadership excellence!
