News
Corporate Governance and Business Ethics
23-Dec-2020
By: Alaa Abdul Aziz Abu Naba’a, Expert in Internal Auditing, Control, and Governance.
In the 1990s, the concept of corporate governance was introduced to the world of business. The rules of corporate governance were used to solve a wide range of ethical and administrative problems which were the reason behind the bankruptcy of many organizations all around the world and weakened their performance in many aspects. The conflict of interests is on the top of these problems, as this problem includes a wide range of sub-problems between different parties from inside and outside organizations.
In my opinion, the conflict of interest is an ethical problem rather than a managerial one (managerial problems include the problems related to planning, organizing, directing and controlling), therefore, many laws and regulations and corporate governance systems, whether in the public sector, the private sector, or NGOs, included in their principles and authoritative and non-authoritative rules a number of ethical principles and codes of conduct by which the senior management of organizations should comply. For example, the three main principles of corporate governance in Adrian Cadbury report included an important ethical principle which is integrity- (Adrian Cadbury is the father of governance and the first one to define corporate governance as: “the system by which companies are directed and controlled,” a definition which was published in 1992).
Furthermore, the Corporate Governance Regulations of the Capital Market Authority in the Kingdom of Saudi Arabia included two ethical objectives out of nine objectives, as follows:
(1) Achieving transparency, impartiality and equity in the exchange, its transactions, and the business environment and enhance disclosure therein;
(2) Raising the awareness of companies in respect of the concept of professional conduct and encouraging them to adopt and develop such concept in accordance with their nature.
King IV Report on Corporate Governance
King IV report on governance, (Mervyn King), is one of the best international references on corporate governance; the report was adopted by dozens of countries all around the world. This report, along with the previous three reports, were used to launch many international initiatives, sponsored by the UN and other international organizations in different parts of the world. The initiatives include the Global Reporting Initiative, the UN initiative in cooperation with the International Federation of Accountants (IFAC) to establish the International Integrated Reporting Committee, along with many other initiatives. Moreover, many professional organizations have modified some of their frameworks in accordance with the four reports of Mervyn King, such as the Institute of Internal Auditors (IIA), which incorporated a group of modifications in the International Professional Practices Framework (IPPF) of internal auditing.
Mervyn King has defined governance in his fourth report briefly as: the exercise of ethical and effective leadership by the governing body towards the achievement of the following governance outcomes: (1) Ethical culture; (2) Good performance; (3) Effective control; and (4) legitimacy. (The term governing body in this context means for example, the board of directors, the board of trustees, or whosoever undertakes their roles in various organizations, or the board of trustees in the ministry of endowments, or even the owners in individual businesses). Also in the report, the ethical leadership was defined as “a mixture of integrity, fairness, transparency, competence, responsibility, and accountability,” while ethics were defined as: “to treat others as you would like to be treated yourself.”
Mervyn King IV report included 17 principles for governance as well as 208 recommended practices which are divided into the 17 principles. Three of these principles focused on ethics; they are as follows:
(1) Principle 1: The governing body should lead ethically and effectively.
(2) Principle 2: The governing body should govern the ethics of the organization in a way that supports the establishment of an ethical culture.
(3) Principle 13: The governing body should govern compliance with applicable laws and adopted, non-binding rules, codes and standards in a way that supports the organization being ethical and a good corporate citizen.
Mervyn King has allocated 18 recommended practices to these three principles, the details of which cannot be stated in this article, yet, we will highlight an aspect relevant to them. Some of the recommended practices to enhance the ethical leadership are as follows:
(1) All the members of the governing body must enjoy integrity through:
• Acting in good faith and in the best interests of the organization.
• Avoiding conflict of interest.
• Taking all the ethical consequences into account for each decision beyond mere compliance with laws and regulations.
• Considering themselves as an ethical role model for all the staff of the organization.
(2) The governing body must set the ethical principles and the code of conduct that govern the work in the organization, and must introduce the same to the staff and the stakeholders and encourage them to comply with these principles.
(3) The governing body must monitor the compliance with the ethical principles and the code of conduct.
Internal Control and Business Ethics
Corporate governance is concerned with business ethics and internal control as well. By referring to the best internal control systems in the world, such as COSO’s report - Committee of Sponsoring Organizations of the Treadway Commission - and the model of measuring the criteria of control (CoCo), we notice the great focus on the importance of business ethics.
Principle 1 of the 17 principles of COSO is: “The organization demonstrates commitment to integrity and ethical values” (ethical values have the same meaning as the above mentioned ethical principles), this principle has four main points which were referred to in the report, and they are:
(1) The management must set the ideals of the organization: all members of the senior management should demonstrate the importance of integrity and ethical values through their directions, actions and behaviors, in order to support the internal control function.
(2) The organization should develop the code of conduct (criteria): the senior management’s expectations regarding integrity and ethical values must be defined in the organization’s code of ethics, and the code of conduct should be realized and recognized by all levels of the organization, including external services’ providers and business partners.
(3) The management should evaluate the compliance with the code of conduct: A process for evaluating the performance of individuals and teams, in light of the expected code of conduct of the organization, should be applied.
(4) Addressing violations on a timely basis: violations to the expected code of conduct should be determined and rectified consistently on a timely manner.
In the CoCo framework, we see that it includes 20 criteria for internal control, three of which are related to ethical principles and the code of conduct. The three principles are:
(1) Common ethical values should be established within the organization, integrity on the top of which, and these values should be communicated and practiced in all departments of the organization.
(2) Policies and practices of the human resources in the organization should be consistent with the ethical values, and should support the achievement of the objectives of such values.
(3) Mutual confidence between the employees of the organization should be reinforced to support the flow of information between them, and to support the effectiveness of their performance towards achieving the objectives of the organization.
To sum up: Governance systems are worthless without compliance with the common ethical principles in the business world. All members and levels of the senior management in the organization, as well as the employees, and the internal and external stakeholders, should comply with the ethical principles and work within an ethical environment that supports compliance with these principles by all parties.
The desire to maximize the revenues and the profits does not contradict with adopting an ethical behavior with all stakeholders; any gains that arise from working in unethical manner are short-run gains. Ethical principles are one of the tools used to combat fraud with its three types (corruption, misappropriation, and manipulation of information) and are also used to fight unethical practices. Moreover, compliance with the ethical principles became one of the indicators used in evaluating the competitiveness of organizations and is considered a strategic component for continuity of a business, hence strengthening the ethical principles in the society as a whole.
The great poet Ahmed Shawki said in poetry: Nations prevail as long as they preserve their morals***If their morals are gone, they perish, and I say in prose: the existence and development of organizations, in various industries, and the achievement of integration between the interests of all stakeholders, depend basically on the adoption and practice of the highest levels of business ethics.