Business ethics and corporate governance are important factors in a company’s functioning. Business ethics represent the values a company follows, while corporate governance is the internal framework that governs and protects those invested in the company. Three normative ethical theories include shareholder, stakeholder, and social contract theories. A company’s mission statement may focus more on a social aspect of operations rather than a profit motive to repay shareholders.
Business ethics and corporate governance are two significant factors affecting the company and its functioning. Business ethics represent the values, principles or characteristics that a company follows when conducting business in the economy. Corporate governance is the internal framework that a company designs and implements to govern and protect those invested in the company. The relationship between ethics and governance comes from the owner or managers of an organization, who create governance and decide what ethical principles employees will follow.
Business ethics generally follow a normative theory. This theory states that individuals and businesses will follow ethical principles commonly found in society, hence the term normative or standard ethics. Three normative ethical theories include shareholder, stakeholder, and social contract theories. Shareholder ethics theory states that a company should create a relationship between business ethics and corporate governance that is shareholder-centric. Managers will employ strategies and activities that promote or increase shareholder investment.
According to the stakeholder theory of ethics, business ethics and corporate governance focus on everyone who has a stake in the business. While wide-ranging, this connection between these factors is often stronger, as recent changes to corporate governance now include any person affected by the company. This connection ensures that everyone gets a fair or equal treatment when dealing with the company. For example, customers who purchase a defective product can receive a free replacement and some additional benefits. This promotes business ethics throughout the organization.
A third and final ethical theory is the social contract theory. This theory focuses on companies that improve the overall welfare of society. Shareholders may be less willing to invest money in a company that follows this ethical theory, as shareholders may lose money to causes or other benefits that are outside the normal operating environment of the company. To make investors fully aware of the ethical theory of the social contract of society, business owners, executives and board members will often include this information in corporate governance.
Another relationship between business ethics and corporate governance is a company’s mission. The mission statement clearly outlines the standard of excellence a company plans to operate in a corporate environment. This mission statement may focus more on a social aspect of operations rather than a profit motive to repay shareholders. In these types of companies, shareholders will invest in the company because they believe in the company and want to see it succeed in its social mission.
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