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Business ethics: Why Ethical Corporate Governance Pays Off

How do you act economically and morally at the same time? Business ethics deals with this question - businesses establishing and adhering to appropriate values are more successful in the long run.

by Moritz Homann 3 min

    Imagine the following situation: An employee has the chance to land a big contract but this can only be achieved through a small “financial favour”. What should he or she do? Accept the bribe and simply add it to the cost of the bid? Or refuse because bribery goes against one’s conscience? This creates a classical ethical conflict for the employee and it is important that companies put corporate ethics into place clearly stating that “corruption is not compatible with our corporate culture”.

    What is meant by business ethics?

    Business ethics deals with the question of the values and principles a company should adopt as well as how the pursuit of economic success can be achieved while adhering to a strong moral compass. Business ethics is a part of economic ethics. While the latter addresses the topic on a general level, business ethics takes into account specific rules of conduct for one’s own organisation. It provides guidelines for managers and employees on how to act ethically and make the right decisions. Basic principles of business ethics are, for example, integrity, responsibility, respect, justice, sustainability and transparency. They apply to dealings with employees as well as customers, business partners, society and the environment.

    What does business ethics mean in practice?

    It goes without saying that companies should comply with laws and regulations. Business ethics goes a step further and is value based. For example, a company acts ethically by creating fair working conditions, promoting inclusion, paying attention to the observance of human rights, using resources responsibly and working to protect the environment. Corporate Social Responsibility (CSR) is closely related to business ethics and it comprises voluntary measures the company can use to demonstrate that it has assumed social responsibility. For example, this can be a social commitment in an old person’s home or avoiding plastic waste in the canteen.

    Ethical corporate governance pays off

    There are many reasons why ethical corporate governance pays off. As well as reducing risk, it has an impact on reputation, customer loyalty, recruiting and employee retention. All of this ends up saving costs and improving the bottom line.

    • A company that acts ethically is perceived as trustworthy and reliable by major stakeholders such as customers, suppliers, employees and the public. A good reputation can lead to higher sales and profits in the long term. For more than 50% of customers in Germany, for example, social and ecological action is an important purchase criterion.
    • People want to come to work with a clear conscience and desire a fair and respectful environment. Corporate ethics makes people happy, as Dr. Bettina Palazzo knows well. Happy employees are more productive, less likely to be ill and tend to remain in the company longer.
    • Today, applicants are also paying attention to social responsibility and sustainability when choosing an employer. Ethical corporate governance therefore contributes to positive employer branding and makes it easier to attract qualified candidates.
    • Companies that act ethically have a lower risk of being involved in legal disputes or paying fines.

    How to best implement business ethics

    1. Firstly, you should identify and define the values that the company wants to be guided by. As a rule, this is done with a Code of Conduct. That forms the foundation of the company’s ethics, lays down rules of conduct, addresses risks and shows what disciplinary measures may be taken in the event of violations.
    2. The best Code of Conduct is useless if no one knows it exists. Therefore, you need to communicate it throughout the company. The document should be easily accessible to everyone, for example on the intranet or through special compliance and communication tools such as EQS Policy Manager or EQS Rulebook.
    3. Create clear responsibilities. Who is responsible for compliance with corporate ethics? You should appoint a compliance officer for this. Larger companies often decide to set up their own compliance department. The HR team also plays a key role in communicating and implementing ethical corporate culture.
    4. Managers should set an example by living corporate ethics. If they do not, employees might wonder why they should bother observing values and rules. Ethical corporate governance often fails because of the phenomenon of power poisoning whereby people in privileged positions self-righteously disregard rules. The reasons why corporate governance is so difficult is explained in this guest article by Dr. Bettina Palazzo.

    How do compliance/compliance management and ethical corporate governance belong together?

    Compliance and ethical corporate governance are closely linked. Strictly speaking, the former refers to the observance of laws, regulations and internal guidelines while the latter addresses responsible action in accordance with moral principles. Both areas can be covered by an effective compliance management system that includes all the tools and processes to ensure both compliance and business ethics are adhered to. Furthermore, such a system helps to establish and further develop a corresponding culture.

    Business ethics will be indispensable in the future

    Ethical corporate governance plays an important role with regard to the Corporate Sustainability Reporting Directive. The CSRD introduces new obligations for sustainability reporting across the ESG areas of the environment, social and governance. The EU Commission published the final version of the legislation in December 2022 and now member states have to transpose it into national law. The new obligations will then apply form the start of the financial year on 01 January 2024 or at a later point. Those who have put ethical corporate governance into practice will be able to comply with the CSRD more easily.

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    Moritz Homann
    Moritz Homann

    Managing Director Corporate Compliance – EQS Group | Moritz Homann is responsible for the department of Corporate Compliance products at EQS Group. In this function, he oversees the strategic development of digital workflow solutions tailored to meet the needs of Compliance Officers around the world.