The Legal Foundations of Corporate Governance Principles - Why Infuse the Muddy Rules of Business Ethics?

Abstract

The focal point of this paper is to establish how minimal a role business ethics has, or should have, in determining the scope, extent and contours of corporate governance principles that guide international commerce at present. The driving force behind the New Global Economy, as Almond & Syfert say, is international competitiveness. As multinational enterprises struggle to meet the challenges of today's freewheeling, truly global marketplace, governments and businessmen alike are re-examining and re-evaluating virtually every aspect of international business practices. Thus free trade and competitive business strategy has come to define the breadth and substance of international commerce. Corporate ethical conduct, as used in this abstract (and to be followed in the final draft), includes more than ethically motivated decisions to make charitable contributions to philanthropic causes. All business decisions motivated by corporate officials' ethical values, rather than their desire to benefit the corporation in the long run, will be treated as a manifestation of corporate ethical behavior, which also has some scholarly support. The category does not include those corporate actions that, though claimed to be altruistic, are in fact motivated by a desire to benefit the corporation. We however include corporate behavior that, though not motivated by a desire to benefit the corporation, may in fact do so. Keeping this in mind, we juxtapose the norms of corporate governance with the maximands of business ethics of a corporation. Hypotheses of the paper The paper argues from the stand point that corporate governance principles that are to be followed by companies are separate and distinct from business ethics. The purpose and objective of the paper is to establish that outside the norms of corporate governance there exist no ethical values which bind a corporation. In this regard, the paper raises and addresses the following questions: 1. As per the provisions of Section 217 (2AA) of the Companies Act (Indian Statute), 1956 a company is required to give Directors' Responsibility Statement regarding preparation of annual accounts, applicable accounting standards, etc. Clause 49 of the Listing Agreement requires a separate Corporate Governance Report together with Management Discussion & Analyses to be given along with Directors' Report. It is submitted that there exits no corporate governance norms outside Clause 49 of Listing Agreement and specific provisions of the Companies Act, 1956. Comparative study also reveals the codification of Business codes by various governments, especially the United States, which demonstrates how business ethics has become synonymous with legal obligations. Would it therefore be possible to argue that outside the business codes that have been adopted, the company should not be free to pursue its trade policies to maximize its profit? 2. It is a well accepted principle that the Board of Directors and officers of the company is supposed to run the business with the objective of maximizing corporate wealth and shareholder profit. The company is also allowed within the limits of the law to gain advantage at the expense of others involved in the transaction, and that they may do so 'at the expense of others ... does not for that reason constitute a breach of duty'. If there is no infringement of the law per se, why not a corporation be allowed to maximize its corporate wealth by adopting such means and methods? 3. The emphasis on free trade and competitiveness, outlined above, should not however mislead us to believe that practices such as bribery, smuggling and kickbacks should form part and parcel of free trade. These corrupt and undesirable practices are undoubtedly anathema to the growth of international trade and commerce, and as such they are to be prohibited and penalized. However, it is important to note these practices are, more than the lack of ethics they display, are also prohibited and frowned upon by the law. Consequently, we feel obliged to ask the question: What, then, is the domain of business ethics in the sphere of corporate governance? The paper endeavors to answer this last question by delving into the first two issues outlined above, and would conclude by demonstrating that if a corporation's actions confirm to both law and economic prudence then there is no need to dress it up in the language of ethics and values. In short, we argue that corporate governance principles are solely dictated by legal obligations in force and are completely devoid of ethical considerations.