Business ethics and corporate governance are two significant factors that impact a company and how it operates. 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 into the company. The relationship between ethics and governance comes from an organization’s owner or executive managers, who create the governance and decide which ethical principles employees will follow.
Business ethics typically follow a normative theory. This theory states that individuals and firms will follow ethical principles that are commonly found in society, hence the term normative, or standard, ethics. Three normative ethic theories include stockholder, stakeholder, and social contract theories. The stockholder ethical theory states that a company should create a relationship between business ethics and corporate governance that focuses on stockholders. Managers will employ strategies and activities that advance or increase the investments of share holders.
Under the stakeholder theory of ethics, business ethics and corporate governance focuses on anyone who has a stake in the business. Although wide ranging, this connection between these factors is often stronger, as recent changes to corporate governance include now any individual who is affected by the company. This connection ensures that everyone receives equal or fair treatment when dealing with the business. For example, customers who purchase a faulty product may receive a replacement at no charge and a few extra 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 into a company that follows this ethical theory, as shareholders may lose money to causes or other benefits that are outside of the company’s normal operating context. To make investors fully aware of the company’s social contract theory of ethics, business owners, executives and board members will often include this information in the corporate governance.
Another relationship between business ethics and corporate governance is a company’s mission statement. The mission statement clearly outlines a company’s planned standard of excellence for operating in the business environment. This mission statement can focus more on a social aspect of the 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 desire to see the company succeed in its social mission.