Business Ethics Project III
Cross-Cultural Management Journal
Volume XX, Issue 1 / 2018
59
Oana-Marina BĂTAE The Bucharest Academy of Economic Studies
ETHICS AND THE IMPACT ON CORPORATE GOVERNANCE
Review Article
Keywords Ethics,
Code of Conduct, Fraud,
Whistleblowing, Romanian Banking Ethical Code,
Corporate Governance
JEL Classification D73, G30, M14
Abstract Nowadays, more than ever before, the companies are under the watchful eye of the stakeholders. However much energy, effort and also expertise a company brings in order to bear on the risks of the unethical behavior, many surveys have proved that fraud, bribery and also corruption are unlikely to completely disappear. In order to prevent an unethical behavior, companies must be able to identify, investigate and also remediate actions of different individuals who are prepared not to comply with the ethical principles. Ethics is an important aspect formalised through a Code of Conduct within companies, which has the role to articulate the core values and also employees’ behavioural expectations. It is the responsibility of the management to ensure that the personnel follows this code, otherwise it is informed about the penalties that might arise. Ethics is characterized also by transparency, supporting an increase in the trust of people and institutions.
Cross-Cultural Management Journal
Volume XX, Issue 1 / 2018
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INTRODUCTION
Business consists in the balance between risk and
also reward. It is well known that once the reward
becomes greater, meaning higher earnings of the
company, increased market share, faster increase in
share price, the risk becomes higher and needs to be
managed very well.
Many companies are constantly assessing the risks
that might arise, both in certain and uncertain
situations, fraud being only one of the multiple risks
that entities are facing in their day-to-day activities,
but fraud is very often perceived as a remote risk –
“it does not happen here”.
However, the companies need to challenge
themselves and make a realistic risk control self-
assessment and answer the question: “How could it
happen here?” It is difficult to address this question
because often the perpetrators of fraud are actually
individuals who occupy position amongst the most
trusted employees and challenging such persons,
who may have been a part of the company for many
years, places the management in an uncomfortable
position (Hussain, 2014).
This is the moment in which the most trusted
individuals break the Ethics Code of the
organization they are part of.
ETHICS – A KEY ISSUE NOWADAYS
Different ethical dilemmas and also multiple
compliance complexities are faced nowadays by all
type of organizations.
The health of the business can be protected by
developing an accurate framework for the
compliance programs and by identifying, assessing
and controlling the risks each company is facing.
During the time, a decrease in confidence of the
public service was observed among all citizens,
along with an increase in the mistrust level. (Public
Management Service, 1998).
Nowadays, most organizations are facing a wide
range of different compliance requirements, internal
and external, that have to be met in order for their
business to keep looking forward. Ethics and
compliance challenges are, in fact, magnified by:
multiple changes in the business structure, various
complex operations, new or changed laws and
regulations and also increase in the enforcement.
A survey prepared by Management Today (“MT”)
together with KPMG Forensic Accounting which
included the opinions of more than 800 managers,
senior managers, directors and partners, points out
the need of ethics since the beginning, this having to
be taken into account due to the following facts
highlighted in the survey: one of three persons says
that each individual lies to their coordinator
depending on occasion; less than half of individuals
who participated in the survey consider the persons
at the top to hold, indeed, strong ethical principles
and to be considered role models for the other below;
25% affirmed that favoring family or close friends
in awarding different contracts still occur even if it
is considered unacceptable; 7% even agreed that it is
fine to inflate profits in an artificial manner as long
as money are not actually stolen; individuals over 40
years adopt a more judgmental approach to their
ethical behavior; one of five individuals was actually
prepared to admitting that it is totally unacceptable
to charge personal entertainment to company’s
expenses; the reasons of not reporting a fraud
include one of the sentences: “It’s a fair game” or
“Everybody is doing it” or “It’s none of my
business.” (Weait, 2001).
During their career, many professionals have to deal
at least once with temptation. Often, gifts are used in
order to disguise criminal activity and bribes and in
most of the cases this situation is hard to be isolated.
Such gifts can be represented by cash; luxury trips,
travel and accommodation abroad; free holidays;
buying immovable properties below their market
value etc. Once the gifts are accepted, the ethics falls
over (Pickett, 2010).
The first individual who confronted the dependent
relationship between both self-interest and ethics in
the economic behavior was Adam Smith. Also,
Adrian Cadbury has written about the company
codes and how they are prepared with the scope of
providing guidance to the employees. (Jones and
Pollitt, 1998).
ETHICAL CODES IN LONDON
Over the time, different codes have been developed
in order to suit various companies, these covering
either honesty, conduct, objectivity and so on.
A code of conduct is able to provide an easily
accessible statement of all the core values which
relate to the ethical and legal conduct of the
business.
It should typically be comprised of sections related
to: provided services to customers, personal
interests, conflict of interests, inducements and gifts,
insider trading, relationship with both auditors and
regulators, money laundering, personal expenses
claims and reporting the breaches of the code.
(Hitchins et al, 1996).
It functions as an internal document which is
important in the decision making process. In
addition, the code of conduct is also designed to
serve to the stakeholders of a company and to fulfill
their expectations towards the profession.
Some of the purposes of the codes of conduct are the
following: to promote an ethical behavior; to
provide guidance when an individual faces difficult
decisions – a proper code will make distinction
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between serving public interests and internal rules or
loyalty towards a company; to establish both the
rights and accountabilities; to state the moral and
professional development; to enhance the status of
each profession etc (Palidauskaite, 2003).
One of the ethical codes is represented by the Civil
Service Code which comprises a set of provisions
which cover the conduct of the civil servants and
most areas of concern and the need for impartiality.
All civil servants should have a behavior defined by
honesty, impartiality and integrity, conduct which
can be acquired by taking into account the
following: impartial and honest advice shall be
given to each Minister without being constrained by
favor or fear; all information relevant in the decision
making process shall be made available anytime not
only upon a request; civil servants shall deal with the
affairs of the public in an efficiently, promptly and
sympathetically manner, without maladministration
or bias; they should use in an effective and efficient
manner the money of the public; they should not take
advantage of their position to follow their private
interests or the interests of others; they shall refuse
any benefits of any kind from another individual,
benefit which might reasonably be seen by others to
compromise both their integrity and their
professional judgement; they shall behave in such a
way to deserve and also keep the confidence of the
Ministers; they shall also comply with all the
restrictions on the political views which are implied
by their profession; any official information shall
not be disclosed by the civil servants without
authority; they shall not try to influence the
decisions or even actions taken by Ministers;
whenever a civil servant confronts a situation in
which he or she thinks is forced to act in an illegal
manner, he or she must report immediately to the
appropriate persons which have the right authority
to act in a specific manner according to the Code;
civil servants have the duty to report any breach of
ethics or an unlawful fact exercised by others, to the
appropriate authorities in a proper time; the duties of
confidentiality need to be exercised even after they
are no longer serving to the public (The Civil Service
Code, 2013).
Another type of ethical code is represented by the
Nolan principles. In the Nolan code, seven
principles are united in order to form the basis for
development of a more detailed code for the public
sector: integrity - individuals shall not place
themselves under any obligation that might lead to a
weak performance of their duties due to the
exercised influence; objectivity – any contract award
or recommendation of an individual for rewards or
an appointment for a top position shall be made on
merit, without a breach of integrity; selflessness –
the decisions are taken solely by covering the public
interest and not the personal ones or of their family
and friends; accountability – the holders of public
office are fully accountable for both their actions and
also decisions no matter what consequences might
appear; openness – they shall be as open as it is
possible regarding the decisions they make and the
actions they take, all the actions being explained by
appropriate reasons proving transparency on the one
side, but on the other side they shall restrict
information if it is not appropriate to reveal it;
honesty – any private interest relating to the public
one must be declared and any conflict between the
two of them must be resolved; leadership – the
promotion of these principles shall be done at each
occasion (The Nolan Code, 2014).
BANKING ETHICAL CODE IN ROMANIA
Another code is the one covering the Romanian
banking system and adopted by the members of the
Romanian Associations of Banks (“RAB”). By
applying the stipulations of the Banking Ethical
Code, RAB is proposing the following: to promote
an adequate conduct of the employees of the credit
institutions towards the clients, authorities, banking
environment, business community and colleagues;
to enhance the confidence of the clients in the
financial banking sector as a whole; to promote the
public image according to which the credit
institutions and the banking personnel offer their
clients highly qualitative products and services; to
encourage and promote the good cooperation
between the banks; to sustain a correct competition
on the financial banking market in accordance with
the market conditions; to promote the mutual respect
within the banking community.
The Banking Ethical Code is applied to all the banks
which are members of RAB. In the cases in which
the banks are outsourcing some of their activities,
the responsibility regarding the compliance with the
Code is maintained by the credit institutions who use
outsourced activities.
The fundamental principles which must be respected
by all the employees of the credit institutions in their
professional relationships with either the clients, the
authorities or other employees of other banks, are
the following: moral integrity – this is a principle
according to which the employees are not allowed to
request or accept, directly or indirectly, for
themselves or for others, any advantage or any
benefit linked to their position in the bank or to
abuse in any way of their position; impartiality and
discrimination – this is a principle according to
which the employees of the financial institutions are
obligated to maintain an objective attitude, neutral to
any political, economical, religious interest when
carrying out their activities; professionalism and
transparency – this is a principle according to which
the personnel has the obligation to fulfill its tasks
with responsibility, competence, efficiency,
rightness and clarity; compliance with the laws and
regulations; confidentiality – this is a principle
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which highlights the obligation of the employees not
to transmit any confidential information regarding
the facts, data and information related to the carried
out activity, to persons which are not authorized to
received such information. The personnel of the
banks is obligated to keep the professional secret
towards any information and not to use such
information in order to obtain personal advantages,
any deviation from this principle being punished in
accordance with the applicable laws; preventing and
combatting corruption facts, money laundering and
terrorism activities – through reporting any
transaction which might have any link with those
mentioned, in accordance with the applicable laws;
to exercise prudent activities – when carrying out
any financial transactions through the responsible
administration of the own funds of the credit
institutions and also through informing the clients
about the offered products and services of the banks;
social responsibility – this is a principle which
highlights the implications in resolving different
social problems; avoiding denigration – a principle
according to which the employees of the credit
institutions will exercise their activity with good
faith, respecting the interests of the parts which are
implied and also respecting the interests of the loyal
concurrence in the concrete market conditions.
An important aspect of ethics is related to the
conflict of interests which appears whenever an
incompatibility situation between the statute of the
employee of the credit institution and the personal
statute of this individual, transposed through any
action which might affect the reputation of the
organization. The personnel of the banks is allowed
to carry out different activities outside the credit
institution with the condition not to prejudice the
activity and the position detained by the employee
of the bank. Each employee is expected to avoid the
implication in different activities which enter in a
conflict zone with the interests of the credit
institution and its shareholders.
In order to avoid such situations, the personnel has
the following obligations: to not follow any financial
or personal interest and to act only in the interest of
the bank the employee is working for and the
shareholders and clients of the organization; to not
follow any personal interest when performing
transactions in the account of the clients which is
different from the interest of the customer; to not
borrow money from own funds to the clients or from
the clients of the credit institutions; to not offer any
other service different from the ones of the bank or
group he is part of; to not accept any gifts or rewards
from the clients in order to facilitate any bank
operation, exception being any gift with a symbolic
value or any participation to events to which a
refusal might affect the relationship between the
bank and its clients (The Romanian Association of
Banks, 2009).
CORRUPTION AND WHISTLEBLOWING
Transparency International defined corruption as
being represented by the abuse of public power in
order to obtain a private gain and it has listed the
most significant forces that encourage bribery. Over
the time, all the changes and developments occurred
not only on economics, but also on other areas, led
to an increase in corruption met in foreign
organizations of senior staff due to the following:
low public salaries, changes in political party
funding, deterioration of laws and regulations,
public tolerance of the corruption, inefficient
controls on money laundering, increase in secrecy of
the government, different restrictions on media.
Corruption appears when ethics falls over and it
impacts companies in many ways. Sometimes in
worst case scenarios it can cost lives, and in the most
encountered cases, it costs people health, freedom
and money. These costs can be divided into four
categories such as: economic, political,
environmental and social.
Economically, it breaks the national wealth, the
corrupt politicians investing in projects that in fact
will fulfill their pockets rather than benefit
communities.
Politically, corruption is one of the major obstacles
to the law and democracy, public institutions losing
their legitimacy when they are misused for personal
advantages.
On the environmental front, natural resources are
exploited in a careless manner and the ecological
systems are destroyed. All over the world,
companies still pay bribes in return for access to
unrestricted destructions through different approved
projects.
Socially, corruptions leads to a decrease in the trust
of individuals in a state as a whole (Transparency
International, 2018).
When people do not speak about corruption, it often
is unchallenged. The reason for which
whistleblowers are considered to detain a crucial
role in saving companies from corruption is the fact
that the witness, in most cases, provide invaluable
insights, becoming a powerful tool used in the fight
against corruption.
However, in many countries across the world,
blowing the whistle brings a high personal risk,
especially when no legal protection is offered.
Though the whistleblowers are a benefit to the
public, sometimes they are seen as betrayers. Also,
they are not expected to often report misconduct in
their workplace if the employers did not ensure a
clear channel of internal reporting of soft facts
within the organization (Transparency International,
2013).
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ETHICAL THREATS AND SAFEGUARDS
Any situation in which an individual or an
organization is tempted not to comply with their
code of ethics is considered an ethical threat.
There are five types of ethical threats such as: self-
interest, self-review, advocacy, familiarity and also
intimidation.
The guidance or any action which has the scope of
removing the ethical threat represents an ethical
safeguard.
Usually, the ethical safeguards fall into three main
categories which are created by profession, work
environment and also individual.
The safeguards created by profession include the
following: setting of a proper code of corporate
governance within the company and also
supervising the professional work, process which
includes also disciplinary proceeding.
In case of the work environment safeguards, the
followings are included: a strong control
environment within a company, efficient and
effectively internal controls established within a
company, accurate disciplinary procedures,
organizational code of ethics or conduct and also a
set of review procedures and policies up to date.
For the individual safeguards, the followings are
examples of components: compliance with all the
professional standards established at the level of an
entity, maintaining records of issues identified and
measures through which the risks were mitigated,
transferred or eliminated, contacting different
professional bodies across the world if questions are
open (Kaplan Publishing, 2014).
THE IMPACT OF ETHICS IN CORPORATE
GOVERNANCE
An effective corporate governance represents one of
the most significant components of a proper
functioning of the economy as a whole. The
corporate governance represents a system by which
the organizations are conducted and also directed
and controlled (The Committee on the Financial
Aspects of Corporate Governance and Gee and Co.
Ltd. – Cadbury Report t, 1992).
Additionally, the corporate governance represents
an internal system which comprises policies,
procedures, processes and also individuals that serve
the needs of both shareholders and stakeholders by
directing and also controlling all the management
activities with integrity, objectivity and good savvy
(Dovonan, 2003).
The ethical responsibilities relate to what is actually
expected from different companies across the world
compared with what those entities are required to do
from both a legal and economic point of view. In
fact, the ethical responsibilities highlight doing what
is in fact seen to be right comparing with doing what
is actually simply legal.
Hence, higher than both legal and economic
accountabilities are the ethical responsibilities
within a company.
The social responsibility represents the manner both
employees and also people who occupy positions in
top management view their duties in making
decisions that help in protecting, enhancing and
promoting the well-being of the stakeholders and
society as a whole, as mentioned by Carrol in 1981.
The corporate social responsibility strategy includes
five significant steps such as: identifying the
stakeholders, classifying the stakeholders,
establishing the claims of the stakeholders, assessing
the importance of the stakeholders and deciding
upon response to social pressure. All these steps help
including the corporate social responsibility as part
of a company’s strategic planning processes while
behaving in an ethical manner. (Kaplan Publishing,
2014).
CONCLUSIONS
The existence of a good corporate governance
model, high ethics, good business and also high
corporate responsibility are factors which lead to an
increase in the changes of corporate sustainability
(Sims, 2003). Being ethical is all about playing fair,
thinking about the consequences some actions might
bring and also thinking about the welfare of the
others (Mihelic et al, 2010).
Therefore, the ethical leadership is linked to
corporate governance due to both their principles
and characteristics.
However, there will always exist different global
hotspots related to corruption and also impropriety
which will increase both corruption and fraud risks
that an organization might enhance.
Nowadays, businesses are more likely than ever to
become under scrutiny in the relation to their
compliance reporting framework. Thus, in today’s
world, the desired transformation within companies
is enhanced if ethics, corporate governance and
corporate social responsibility jointly become a
significant component of the organizational culture.
In conclusion, in each company a reinforcement
process to commitment to driving ethical growth
shall exist and be always monitored.
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