Can ethics cure corporate governance deficiencies?

“In the mid 1970s, I got a promotion and moved to a new division within Raytheon. Part of what I did was new business development which included developing business in Kenya. The second time I showed up in Kenya, I was approached by people who said: ‘We can help you to get the contracts you’re interested in, if you’re able to do something with us’.

I was completely unprepared to be asked for a bribe….” (From a comment at a Sears public Lecture on Ethics, Bentley College of Business Ethics, October 2003)

That was in 2003 but the situation seems to be getting worse if the recent economic scandals in Kenya are anything to go by.

At the beginning of the 21st Century we witnessed scandals involving individuals and corporations which the public had formerly looked up to and trusted: Enron, Arthur Andersen, WorldCom, Tyco; Closer home there has been similar scams ‘Goldenberg’, ‘Anglo-leasing’, the Euro Bank scandal, the Maize and Petroleum scams in Kenya and similar or worse ones elsewhere.

Such scandals whenever they happen, exact an enormous toll on people, cause a crisis in investor confidence and billions vanish from the stock market.

The experience of repeated scandals awakens people to the reality of corruption which can be simply described as unethical behaviour.

Worse still, behind the statistics are shattered lives of hundreds of thousands of individuals — employees, tax payers, investors and other stakeholders.

The absence of ethics in business is often attributed to poor governance, among other factors. In the past decade attention has increasingly been given to how ethics intersects with corporate governance.

Ethics is a relatively new field in Africa, but quite established in developed countries. It was first defined in the US due to alarming cases of Wall Street ‘insider trading’ in the 1970s.

It is the creed that should be central to the delivery of goods and services. The challenge for the good governance is imprinting values by identifying the right things and doing them correctly.

All encompassing
Whereas governance is about the structures, policies and procedures which should be complied with, it also encompasses ethics.

Corporate governance is defined as the system by which organizations are directed, controlled and held to account.

It therefore demands corporate ‘citizenship’ which requires the direct involvement of the rulers or directors or leadership in disseminating and influencing ethics.

Ethics determines the corporate choice to pursue one objective rather than the other and why to condemn certain behaviour.

This will largely be guided by the directors or the board who are the top leadership that shapes the governance of an organisation.

A critical challenge for business today then, is how to create the commitment and capacity to observe, analyse and understand these environmental forces, and to act in response to them as well as manage and provide leadership in transforming the society.

In order to meet this challenge, businesses must now turn to ethics, as a tool to contend with the dynamics of change for the purpose of decision-making.

An organization that dedicates itself solely to profitability, even if it happens to pay good wages and to produce socially useful products, still remains morally deficient.

This partly explains the emergence on the on-going catastrophic Global Financial Crisis that was triggered by a dramatic rise in mortgage delinquencies in the US. The crisis has exposed pervasive weakness in financial industry including the ethical conduct.

Firms are operated or ought to be operated for the benefit of all those who have a ‘stake’ in the enterprise. This means an inclusive model of ethical management based on the human good of all concerned.

The way in which a company treats its stakeholders: employees, customers, suppliers, communities, reflects its ethical standards. Companies serious about good corporate governance are therefore expected to give business ethics priority. And ethics means people.

The notion explained above of utilitarianism implies that the most important personal attributes of directors or leaders are integrity and probity.

The directorship of a company, is an extremely important task and should be treated as such in all situations. People with negative track records, even if they are politically popular may have nothing to offer to the ethical culture of a firm.

In addition to integrity the leadership must possess the know-how, the competence which is a function of ethics. Men and women with an eye for detail and the ability to put in time and effort towards the success of the company.

This kind of work should not to be entrusted as a reward for political loyalty. In principle, directors ought to be recruited rigorously and transparently.

To achieve this, the directors should be able to: reach a common understanding of the concept of corporate reputation, corporate character and tie its discussion to a comprehensive analysis of the firm’s stakeholder base.

A survey of Corporate Governance in the continent made by G. Rossouw of South Africa and published in the magazine ‘Business and Society’ in 2005, revealed that generally, corporate governance had started heading in the right direction.

A high percentage of the corporations surveyed were found to already have codes of conduct.

Frustrating factors
But several factors were found to frustrate good corporate governance. A lack of active regulatory and institutional frameworks capable of the enforcement blighted efforts.

A lack of transparency was found to deter private firms from listing on the stock exchange for fear of greater scrutiny. State run corporations were reflected as often setting poor example of good governance.

Rossouw also pointed out that there is need for greater cooperation between academia and business. This is because scholars, business leaders, financial press and outside critics were reported to have started paying attention to the relation between ethics and governance.

The report calls for more cooperation in such areas as business ethics training programs, consultancy, and research related to business ethics.

Although this is the recommended model, it is still not specific enough in practice and therefore makes it difficult to find criteria to cover the needs of all.

There is a corresponding need for analysts to provide more discernable and practical knowledge for governance.

Nyandeje is a lecturer at KCA University.