Corporate Governance and Business Ethics

Abstract

Corporate governance can be an important defense against unethical corporate behavior (Carcello 2009). For example, a firm’s board of directors is responsible for overseeing firm management. If the board does not adequately perform this oversight, then it may be easier for managers to behave unethically. In fact, Hoffman and Rowe (2007) report that various investigations found that poor oversight of management by boards was an important factor in various corporate scandals. Two additional issues dealing with unethical corporate behavior that firms should consider when structuring their corporate governance are potential conflicts of interest between the firm and its shareholders and transparency concerning corporate activities. Possible conflicts of interest in corporate governance include whether the CEO is also the chairman of the board (often referred to as CEO duality), the independence of board members, executive compensation (including backdating of stock options), and director elections. Since all of these situations could result in directors or managers placing their interest ahead of shareholder interests, they are all ethical issues. Transparency is an ethical issue because “insiders” such as managers and directors essentially control the information that “outsiders” such as shareholders and regulators receive. As a result, “insiders” can prevent “outsiders” from learning about sub-optimal behavior (such as conflicts of interest) through less transparency. This essay discusses academic research concerning the impact of corporate governance on business ethics. Corporate governance issues discussed are board involvement in corporate ethics codes, board independence, CEO duality, executive compensation, director elections, and external auditors. The specific business ethics issues discussed are potential conflicts of interest and transparency.