The Role Of Ethics In Corporate Governance

1743 words - 7 pages

JOHN WAMBUA NZIOKI
UNIVERSITY OF MARYLAND UNIVERSITY COLLEGE
FIN 610
SPRING 2014

Introduction
This paper discusses the role of ethics in corporate governance. I seek to show the application of moral and ethical principles in corporate governance. Ethics is a topic that has generated a lot of interest in the last decade especially after high profile scandals. The failures of prominent companies such as WorldCom, Enron, Merrill lynch and Martha Stewart portrays the lack of corporate ethics. The failure of such business has seen an increased pressure to incorporate ethics in corporate governance. The result of corporate scandals has been eroding investor and public confidence. The entire economic system has experienced some form of stress from loss of capital, a falling stock market and business failures.
The past scandals that failed the ethics test were characterized by lack proper disclosures on financial records. This paper will reveal the dubious accounting practices that contributed to the failure of some of the companies. According to (Anderson and Orsagh, 2004) not all failures were attributed to corporate ethical issues however most of the scandals involved conflict of interest among directors, excessive compensation though stock options, greed and lack of enforcement of the laws put in place to protect shareholders. As stated by (Paul S. Adler), the legal community appears to not protect shareholders as “white- color” crime is treated far more leniently than “street” crime even though its economic and social costs are greater. This perception has made public perception of white-color crime to be one that is casual
There has been a drive towards corporate governance which has been driven by a greater need for shareholder protection. If investors feel well cushioned then there is a higher chance that they will avail financing. After the 2002 Sarbanes oxley act it has become apparent to pursue sound corporate governance rules and ethical behavior.

Definition.
Corporate governance
Corporate governance has a broad definition. The term is used to describe the ethical balance between economic and social goals of the corporation’s values and practices. The concept defines how the company will relate to its shareholders and society at-large in promotion of accountability, fairness and transparency. The Organization for Economic Co-operation and Development (OECD) defines corporate governance as “Procedures and processes according to which an organization is directed and controlled. The corporate governance structure specifies the distribution of rights and responsibilities among the different participants in the organization – such as the board, managers, shareholders and other stakeholders – and lays down the rules and procedures for decision-making." From the definition we see that there is a relation among managers, employees, shareholders and society as a whole. It is this relationship that makes ethics essential in corporate...

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