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Ethics and Corporate Governance

Date Released: Wed, 13 June 2012 14:32 +0200

By Gwendolyn Zorn, Rhodes University Alumnus


I begin by analyzing ‘what are business ethics’ and why it is of concern to any modern businessperson.

This contains insight into former theories of business and the role of business in society. Such a discussion briefly examines the ‘invisible hand’ argument of Adam Smith as well as Milton Friedman’s argument that ‘the social responsibility of business is to increase its profits’.

The Context of the King Reports: Part I:

The bottom-line argument and the empirical failure of this approach to business: social, environmental and economic

Video Link: https://vimeo.com/43491302

I will then argue that thinking of business and business operations and management purely in terms of the bottom line is no longer, nor indeed ever was, appropriate.

To this purpose the lecture demonstrates that “business is a part of society rather than apart from society”[1] and as such is endowed with the responsibility to ensure that their actions are in accord with our common sense notions of social justice and fairness.

The Context of the King Reports: Part II:

The concepual failure of the bottom-line approach and the move towards a new paradigm in governance: social justice and an introduction to King III.

Video Link: https://vimeo.com/43495968

The analysis then turns to the possible effects of business activities on society according to a spectrum, ranging from morally wrong to social development.

Business actions that are morally wrong would include, for example, sweatshop labour as it is employed by Nike and Apple, whilst actions that contribute to social development would include, for example, the micro-credit scheme provided by the Grameen Bank in India that enables impoverished rural people to take loans without providing collateral.

The value of using the spectrum-approach in this presentation is that the moral spectrum runs parallel to the spectrum of legality.

In other words, actions that are morally wrong are also illegal and can result in severe penalty. Such actions could include paying less than the minimum wage or employing child labour.

However, there are some actions that are morally wrong but legal to perform, for example, Shell’s practice of natural gas flaring in the Niger Delta which has caused a myriad of environmental and social issues.

The lecture also analyses the long-held notion that business executives and directors ought only to be concerned with their fiduciary duties.

Approaching business and business decisions from this mindset is no longer appropriate because the effects of business extend beyond the size of the dividend paid to shareholders.

This is the critical point that Mervyn King and the South African Institute of Directors were motivated by when the first ‘King Report’ was published in 1994.

There was a recognition that business operations could not be segregated from the larger environment in which they were conducted, and so the idea behind the initial King Report on Corporate Governance, and the subsequent King Code, was to incorporate the interests of all relevantly affected stakeholders into governance.

This involved adopting a holistic approach to corporate governance that redefined business sustainability to include not only financial concerns but social and environmental ones as well.

This means that when a businessperson is faced with making a decision regarding what is in the best interests of the company, they ought no longer to think of those interests in purely financial terms.

Yet the question remains that if corporate governance has shifted from an exclusive focus on fiduciary duties to incorporate a wider variety of interests, and if indeed this has been a positive ethical shift, then why are the measures proposed by the King III Code (2009) not legally enforceable?

This brings us to the third category on the legality spectrum: actions that are morally good but that are not legally required, as is the case with many of the measures proposed in King III, such as stakeholder engagement.

The reasons for not making the governance elements proposed by King III legal obligations are twofold.

Firstly, there is an explicit recognition that a ‘one-size-fits-all’ approach to governance is inappropriate. King III, unlike King II (2002), which was only applicable to listed companies, financial institutions and public sector enterprises, aims to be relevant to “all entities”.[2] Therefore some of the proposed measures might not be entirely suitable to one particular organisation. For this reason King III favours an ‘apply or explain’ approach, as opposed to the ‘comply or explain’ approach of the previous reports.

The idea behind ‘apply or explain’ is to discourage the mindless application of the measures and encourage rather the intellectual honesty involved in making the measures suitable to a particular entity.

Secondly, it aims to encourage those entrusted with governance to engage meaningfully with the issues raised in the Report and to apply the measures suggested in the Code to suit a specific organisation. In this way legitimate governance will not simply involve mechanical compliance, but rather will be characterised by a responsible, honest and ethical engagement with the numerous issues that legitimately affect a company’s sustainability.

King III contains a recognition that not all of the proposed measures will be universally applicable. However when a company cannot apply a certain measure if, for example, it will not be economically viable to do so, then good reasons have to provided as to why this is the case. Hence, even in not complying, or in this case applying, there remains nevertheless an engagement with the elements of the Code.

Finally, it is important to note that although the Code is not legally mandatory this does not imply that certain bodies do not still make compliance with the Code obligatory.

For example, since March 2010 all JSE-listed companies have to be King III compliant. This makes an understanding of and an engagement with the elements and principles of King III particularly relevant to the governors and management of any listed company.

The final category in the parallel spectrums of business practice and legality will of course then be those actions that are morally good and legally required, such as the timeous paying of taxes and compliance with minimum wage laws.

A problematic category that falls within the spectrum are those actions that are just but illegal. This is a controversial category. It would include, for example, the attacks by Greenpeace on Japanese whaling fleets.

A business example might be an executive in a country in which it is a legal requirement to concentrate solely on fiduciary duties, such as the United States, but who refuses to perform some action that will increase the bottom line at the expense of the local community.

So, in this case although the executive’s decision is a just one, he/she could still be held legally accountable by the shareholders for not placing their interests above other competing interests.

The final part of the presentation will provide a brief summary of King III as well as one of its key elements: integrated reporting. The approach to the the topic of integrated reporting by describing the JSE SRI[3] criteria for the evaluation of such reports. This will be meaningful in order to show how the elements of King III can be applied and adopted by a business, or indeed, any entity.

In conclusion I argue, as Mervyn King does, that businesses are critical members of society and as such they ought to be governed in a manner that is sensitive to economic, social and environmental issues, and indeed the concerns of all stakeholders, as this is what makes a business truly sustainable.

Responsible corporate citizenship involves acknowledging that effective ‘leadership for sustainability’ is about much more than the bottom line.

 The Context of the King Reports: Part III:

An analysis of the legal context of King III and an introduction to integrated reporting and the standards of the JSE Social Responsibility Index.

Video Link: https://vimeo.com/43515267


[1] Fisher, C. & Lovell, A. Business Ethics and Values: Individual, Corporate and International Perspectives, 2nd Edition. (Essex: Prentice Hall, 2006) p.308

[2] As stated in the Introduction to the King III Report, 2009.

[3] Johannesburg Stock Exchange Social Responsibility Index

[4] These categories come from: Fisher, C. and Lovell, A. Business Ethics and Values: Individual, Corporate and International Perspectives, 2nd Edition. (Essex: Prentice Hall, 2006) Chapter 2: p.38-98 (Although I have adapted them slightly, for example, they say that ‘cheating’ and ‘lying are ‘morally indifferent’ but I leave them under the category of ‘morally wrong’.)