Why there is an increasing focus on ethics as the core of corporate governance

Companies exist to make a profit, but some profitable activities can also be highly unethical. Nationwide regulations and laws go some way to ensure that these practices are prevented, but policies also need to be implemented at board level, stipulating how business should be conducted, and the penalties for ethical breaches. Here we’ll take a look at corporate governance and ethics and explore the difference that good governance can make to the health and performance of any company.

Ethics and its importance in business

Some might say that ethics and business are two entirely separate things; business interests are often in conflict with ethical concerns about the environment, working conditions or public health. But although in the short term, breaches of ethics can increase profits, taken to extremes unethical business practices inevitably prove fatal to any business. One example is that of Bell Pottinger, the PR firm that became embroiled in a scandal involving racial tension in South Africa, and whose attempts to deny wrongdoing and avoid accountability led to its ultimate downfall. The Bell Pottinger case illustrates how, in order for businesses to survive, business ethics and corporate governance must become more closely affiliated.

The role of business ethics in corporate governance

It usually takes more than one standalone event for unethical actions to seriously damage a business. First of all, the breach must be allowed to take place without consequence; perhaps those at board level ‘turn a blind eye’ or even encourage the practice, or perhaps it goes undetected. When wrongdoing is discovered, how the company responds can make or break its future. In the interests of damage limitation, many companies may be tempted to cover up or deny their involvement, which can lead to a collapse of trust and tarnished reputation when the truth is eventually uncovered. It’s easy to see how a combination of hefty legal costs, negative media coverage and a loss of clients could then destroy the business for good.

With corporate governance and ethics closely aligned, matters should never be able to reach this point. Board members can dictate the direction of the business by implementing company-wide policies and penalties. The board can encourage an atmosphere of transparency, where wrongdoing can be reported and dealt with without fear of reprisal.

What can businesses do to improve their ethics?

Thanks to high profile cases like Bell Pottinger, we are now seeing an increasing focus on business ethics in corporate governance.  Companies can improve their ethical scorecard by implementing ethical choices from the top down.

  • The composition of the board can influence its direction, for good or bad. A board evaluation carried out by external experts is a very effective way to assess the current performance of the board and identify any areas to work on.
  • Compliance with the UK Corporate Governance Code will help the business to operate ethically and effectively.
  • Increased transparency, both company-wide and in public, can help businesses to stay on the straight and narrow.
  • A robust whistle-blowing policy can help encourage employees to speak up if they witness any ethical breaches.

For more advice on corporate governance and ethics in your organisation, contact Bridgehouse Company Secretaries for a corporate governance review or board evaluation.