1. Business Ethics and Corporate Governance

2. What is corporate governance?
“The system by which companies are directed and controlled.” Cadbury(1992)
“Boards of directors are responsible for the governance of their companies, while the shareholders’ role in governance is to appoint the directors and the auditors, and to satisfy themselves that an appropriate governance structure is in place.”

3. What is corporate governance?
“Board’s key role is to ensure that the corporate management is continuously and effectively striving for above average performance, taking account of risk, (which) is not to deny that the board’s additional role with respect to shareholder protection.” Hilmer (1993)-Australian context.

4. What is corporate governance?
Governance comes from the word “govern,” which means to control the actions of a group for the benefit of the whole. In the business world, this refers to policies that specifically restrict or direct how people can act.
Essentially corporate governance is concerned with the structure and the functions of the boards of directors of companies, with their links with the companies’ managements, with their relationships with shareholders, and in the case of listed companies, with the stock market, with the independent auditors and regulators, and other stakeholders affected by the companies ‘ activities.
For example, governance policies might include prohibiting a board of directors from awarding contracts to board members’ companies or the companies of family members. A business might require its accounting department to have two signatures on any check it writes to reduce the threat of fraud.

5. What is corporate management?
Management refers to the actions taken by a company to lead the business in a positive direction.
Examples of management include setting budgets, giving staff members directions and making strategic plans about marketing or product development.
Corporations usually have management teams once the company becomes too big for the founder or one individual to oversee the entire business.
Management team members include titles such as department head, director, vice president and manager, chief executive officer, chief operating officer and chief financial officer..

6. Management activities help a business operate, with instruction from top leaders directing the activities of staff members.
Companies create plans for developing, pricing, promoting and distributing their products, put systems into place to oversee their plans and review and assess their projections and performance. Companies manage their employees by training workers to help them perform better.
Analyses of operations help management to determine if the company needs to change any practices, such as bringing contracted work in-house or vice versa, setting new goals, modifying the marketing mix and monitoring financial performance

7. Board structures
In the classical organization chart, management is show as a hierarchy, with levels of management reporting ultimately up to the chief executive.
Responsibility and authority are delegated down the organizational tree and accountability is required back up.
Management is responsible for running the enterprise while the board ensures that the business is being well run and is running in the right direction, by formulating the company’s strategy.

8. Board structures

9. Board structures
The board constitutes from executive and non-executive directors- are known as outside directors and some of them are recognized as independent. No financial interest in the company, other than their directorship and perhaps a small shareholding.
The corporate governance codes of most countries call for a minimum number or given proportion of independent non-executive directors on the boards of all listed companies. Such directors can exercise independent judgment on board matters and represent shareholder interest.

10. Board structures
However other non-executive directors may have connections with the company’s business so they are not seen as independent. ( A nominee of a major shareholder, or might represent a supplier or a distributer, or be a close relative of the chairman or the CEO, or they might be a retired executive of the company)
Subject to their articles of association, companies can choose the size of their board and the balance between executive and non-executive directors. Although listed companies must also meet the requirements of the relevant corporate governance code and the listing rules of the stock exchange.

11. Board structures
In all-executive board , all the members of the board are also members of the management team. This arrangement is often found in family firms, start up companies and in subsidiaries within larger groups of companies.
A company with an executive director majority board has non-executive directors but in a minority. This structure is typical in companies as they grow in maturity and seek additional knowledge and skills from outside directors, or keep executive directors on the board in a non-executive capacity after retirement.

12. Board structures
The non-executive director majority board has the executive directors in a minority. This is the usual board structure in listed companies.
In USA for example all of the major quoted companies have a majority of independent outside directors with just a handful of executive directors, perhaps the chief executive officer ( CEO), the chief operating officer (COO), and the chief finance officer (CFO)
The final option is all-non-executive director board, frequently found in not-for-profit organizations. Where a company has a single governing, the board is known as a unitary board.

13. Board structures
By contrast in two-tier board system of corporate governance there are two boards. The lower-tier board of executives run the business, while the upper-tier or supervisory board of outside directors monitors and oversees the executive board’s performance. Two-tier boards are found in Continental Europe, particularly in Germany, and in other countries influenced by European company law.

14. Board Functions The unitary board has two distinct functions:
Contributing to the company’s performance, by setting its mission, vision and values and formulating its strategies, then agreeing policies and plans for management action and; ensuring conformance with those strategies, policies and plans including compliance with regulatory demands, accountability to shareholders and other legitimate stakeholders, and ensuring adequate transparency.

15. By contrast in two-tier model of corporate governance, the performance and conformance roles are separated. The executive board is responsible for running the enterprise and producing its performance , while the supervisory board oversees the activities of the management and ensures conformance with policies and plans.

17. Conformance / Performance Roles of Boards
Accountability
Ensuring compliance
Transparency
Corporate mission
Corporate vision
Corpoarete values
Strategy formulation
Executive monitoring
and supervision
Policy making

18. Corporate vision, mission, values and strategy formulation
The company directors play a major role in creating the vision, mission and values for their organization. In some cases, the board formally identifies and publishes a view on the purpose, the direction and the behavior of the company: in other cases, the mission and values of the business become apparent from the behavior of those directing, the business, and from the actions the company takes. Business strategy often has ethical dimensions, but ethics can easily be overlooked in the strategic planning process. In formulating corporate strategy some companies fail to consider possible ethical issues. A cost-benefit assessment of a strategic decision should identify all of the stakeholders who could be affected over time, consider possible uncertain future events and the likelihood of them occurring and involve a strategic risk assessment.

19. Example
The software system for Apple’s mobile phones had included a maps app powered by Google's mapping service since However, the Apple board saw that Google’s Android phone software was becoming more of a competitor than a partner. So the directors formulated a strategy to provide their own maps. Over a three-year period, Apple acquired three mapping companies, Than in September 2012 Apple released a software update for their iPhone (iOS 6) that replaced the Google maps on their phones with a new version using mapping data from Apple group companies. The update had some initial problems, including some towns and airports disappearing! However , with 400 million devices running iOS software, the new strategy soon provided Apple users with maps that did not rely on a potential Apple competitor.
The ethical dimension of the strategic decision to introduce an in-house mapping facility included the changed relationship with Google, and new responsibilities that went with offering mapping services including ownership rights, national security, and personal privacy.

20. In formulating strategy, some boards involve all the directors in the strategic thinking process, identifying alternative strategies, identifying risks, imagining possible outcomes, and developing appropriate policies, projects and plans.
However, in other cases the main board receives strategic proposals from the top management, which they can then question, seek clarification, and perhaps refer the proposal back for more information, before coming to a final strategic decision. Some non-executive directors may not have deep knowledge of business or its industry, however well they have been briefed. It is their independence and experience in other situation that enables them to contribute to discussions about strategies, policies and plans proposed by executive management.

21. Policy making
The making of corporate policies flows from the formulation of strategy. Boards need to ensure that policies are in place for each of the functional areas of the business.
( a manufacturing company with subsidiary factories developed product and production policies, which included product design, applications for patents, technology applications, location and procurement, production health and safety, quality control, product safety, liaisons with suppliers, relationships with marketing and inter-group company transfer pricing.)

22. Organizational expectations about ethical behavior are vital if unethical activities are to be avoided. Corporate policies covering business ethics, corporate governance, and enterprise risk management play an important part in ensuring appropriate behavior. Control systems are also necessary to monitor, report, and take corrective action to ensure that such policies are being followed.

23. Executive monitoring and supervision
Many boards find that a significant part of each board meeting is devoted to examining performance and discussing courses of action needed to remedy problem. Although many directors say that primary focus of the board should be on strategic issues, the reality is that more time is spent responding to short-term management problems.
Directors need to ensure that corporate policies are being followed and agreed plans achieved. To carry out these monitoring and management supervision effectively they need information that is timely, relevant and accurate. Most management information and control systems set out to meet those criteria.

24. The classic is the budgetary control system, based on an annual corporate planning cycle, which usually compares monthly financial results against agreed budgetary plans. More sophisticated systems monitor and measure both financial and other performance variables.
In the old days, boards often gave members a large pack of papers for each board meeting, with routine financial and performance reports, project reports, and briefing papers for specific items on the agenda. Modern information systems provide directors with briefing information electronically, and some enable them to raise questions, call for further information, and explore issues prior to board discussions.
Ethical issues frequently arise during a board’s executive monitoring and supervision activities, although they may not be recognized as such.

25. Example
The board of the electronics company was informed that the bid for the supply of a satellite communication system to a country in the Middle East had been successful. One of the outside directors asked about the bidding process and questioned whether any commissions had been paid to the government officials or others involved in awarding the contract. The Chairman intervened, saying that the bidding process was an executive issue. Only matters on the agenda that had been covered in the board papers could be discussed at board meetings. The outsider director was unsure what to do.

26. Accountability, ensuring compliance and transparency
Under the company law and, for the listed companies, under the rules of the stock exchange, shareholders have a right to information, particularly financial information, on the state of their company’s affairs. Moreover, such accounts typically need an auditor’s report that they show a true and fair view of those affairs. In many jurisdictions accounts also have to be filed with the companies’ registrar to be available to potential investors, creditors, analysts and anyone else interested. For listed companies, compliance with relevant corporate governance code is also required.

27. Many listed companies now go much further than the minimum requirements of company law, stock exchange listing rules and corporate governance codes providing comprehensive reports on their corporate social responsibility and sustainability activities and achievements. This information is available to anyone interested and is usually found on the company’s website.
Following the collapse of some major companies around the world-ENRON, Parmalat etc.- societal calls grew for more information about the corporate behavior.
Government regulators, accounting standards bodies and interest groups took up the call for greater transparency in corporate affairs.
However, transparency has costs and consequences. Trade secrets should be protected. Boards need to strike a balance between responding to expectations for greater transparency and commercial viability.

28. The regulation of corporate governance
Being a creation of law, companies must comply with the company laws of the jurisdictions in which they operate. Companies listed on a stock exchange must also comply with that exchange’s listing rules. Most economically advanced countries also now have corporate governance regulations. However, the need to comply varies.
In the USA companies are required to comply with corporate governance regulations under the law. In the UK and many other countries around the world compliance with corporate governance codes is voluntary, with companies required to report that they have complied with the code or, if they have not, to explain why?
Two private sector organizations also play an advisory role in corporate governance regulation in the USA. The Treadway Commission and The Business Roundtable Association.

29. The roles of the board chairman and the chief executive officer
Most corporate governance codes call for the roles of the chief executive officer and the chairman of the board to be held by different people. The intention is to avoid domination at the top of a company by a single individual supported by executive direction who report to him /her and non-executive directors whom he/she has chosen. The separation spreads responsibility, provides a check-and –balance mechanism.
Most listed companies in the UK, and in other countries with voluntary corporate governance codes, follow the doctrine of duality at the heart of corporate governance power.
In the USA however, quoted companies often appoint one person as CEO and Chairman of the Board, sometimes adding the title of President as well. Pressure has been growing, from institutional investors and commentators, for listed companies in the USA to follow the more common international approach separating the roles with a CEO and an independent board chairman .

30. The role of the auditors, regulators and company secretary
The independent external auditor, by reporting to the shareholders that the financial statements presented to them by the directors show a true and fair view of the state of company’s affairs, play a fundamental role in corporate governance. Working through the audit committee, a subcommittee of the main board comprised of independent non-executive directors, the external auditors enable the directors to ensure that they have fulfilled the compliance requirements of the appropriate accounting standards, the corporate governance codes, and the company regulators.

31. In the original 19th century concept of the limited liability company, auditors were appointed from among the shareholders. However, growing corporate scale and complexity, combined with increasing experience among audit firms, created a profession of independent external auditors. By the end of the 20th century five firms (“the big five”.. PricewaterhouseCoopers, Delloite, Ernst and Young, KPMG, and Arthur Andersen) dominated the world market for audit, which was reduced to “big four” when AA collapsed following the Enron debacle.

32. Prior to Enron and resulted new Acts, many audit firms provided their clients with additional services, such as tax planning and taxation services, management consultancy and other advisory services, or company secretarial work and share-registration. For example, Enron’s auditors received more from non-audit fees than for the audit. Many jurisdictions have now imposed restrictions on such additional fees, particularly on work that would subsequently be audited, to avoid potential conflict of interest.
The company secretary who is legally an officer of company, works closely with the board to ensure the necessary compliance. The company secretary may be a member of the board, but increasingly, directors seem to be looking to the company secretary for advice on governance matters of business ethics.

33. Changing expectations in the governance of organizations
The original corporate governance codes, dating from the early 1990s, were voluntary. At the time they were derided by some company chairman as being no more than expensive ticking of boxes affirming compliance. However, since that the collapse in the USA of Enron, the “big five” auditor Andersen etc. has strengthen the view that corporate governance is important.
Three other significant development also occurred.
Corporate governance compliance has increasingly become mandatory , protected in regulation, law and stock exchange listing requirements.
Strategic risk governance and enterprise risk management have become an integral part of the corporate governance process.
Corporate social responsibility and sustainability reporting have also been added to the corporate governance portfolio.