Can Companies Still Afford to Ignore Business Ethics and Corporate Governance in their Own Backyards?
Ein Beitrag von: Tebogo R. Mazibuko, LL.M, MBA; Head of International Business Legal & Compliance
Introduction: Wirecard, a Glaring Cue for Every Company
The current scandal surrounding Wirecard, in which reportedly 1.9 billion euros disappeared from its balance sheet, is the latest and greatest of its kind and even named by some experts as the “Enron of Germany” (Browne, 2020). This has not only exposed the short-comings of Germany’s regulation of the financial services sector, but has also caused a renewed interest in business ethics and corporate governance. An article was published in this week’s German Handelsblatt, reporting on the continuously fraudulent workings by Wirecard’s CEO and his close ally, a director at Wirecard over a period of one and a half decades (Bender, Holtermann, Iwersen, & Schneider, 2020). While it is the scandals surrounding large multinational corporations that make the headlines, topics of business ethics and corporate governance are also central to small and medium enterprises (SMEs), as SMEs are drivers of the European economy (Bundaleska, Dimitrova, & Nikolovska, 2012, p. 4) with a vast range of stakeholders. Furthermore, there is a range of benefits for SMEs trading with solid business ethics and corporate governance, for example, reduced risks between owners, increased access to credit and higher resilience to financial costs from fraud or theft (The Association of Chartered Certified Accountants, 2015, p. 5). Based on the aforesaid, the topics of business ethics and corporate governance are important for all companies and businesses and together constitute the topics briefly discussed in this mini paper.
Real Business Ethics are an Unavoidable Foundation
Business ethics is defined by the London-based Institute of Business Ethics as “the application of ethical values to business behaviour […] relevant both to the conduct of individuals and to the conduct of the organisation as a whole. It applies to any and all aspects of business conduct, from boardroom strategies and how companies treat their employees and suppliers to sales techniques and accounting practices.” (Institute of Business Ethics, 2020). Along with this, it is important to note that ethics go beyond the abidance by legislation and are guided by values (Institute of Business Ethics, 2020). The academic field of behaviourial business ethics emanates as a response to highprofile corporate scandals that were reported on approximately fifty years ago and with the exponential increase of corporate scandals since the 1980s, this area is attracting increased attention from academics in social science and psychology (Kish-Gephart, Trevino, Chen, & Tilton, 2019, p. 3).
Conceptually, business ethics at national level encompass at least three levels, namely individuals, organisations and systems (in this case, micro-,meso- and macro-levels) (Enderle, 2015, p. 724). In the same vein, three dimensions of corporate ethics have been identified, based on how companies position themselves in relation to ethical behaviour: external (focused on the impact of a company’s ethical behaviour on external stakeholders), internal (considering mainly the manner, in which a company designs and executes its key functions so as to be in line with prevailing regulatory prescripts and societal ethical standards) and employee (looking at how corporate ethics show up in the day-to-day behaviour of employees and how employees also rely on their own moral standards to guide their daily decision-making and behaviour) (Chun, Shin, Choi, & Kim, 2013, p. 856). An examination of literature on the topic of business ethics highlighted matters such as morality, ethical decision-making and corporate social responsibility (CSR) (Vazquez, 2018, p. 692). In the specific context of family-owned businesses, issues like governance and succession were observed to take precedence (Vazquez, 2018, p. 692).
Corporate Governance is the Next Cornerstone
There is a direct link between business ethics and corporate governance, considering that the latter requires corporate leadership “to give life to an organisation’s guiding values, to create an environment that supports ethically, sound behaviours, and to instill a sense of shared accountability among employees” (Camilleri, 2018, p. 3). Viewed from this perspective, it follows that ideally corporate governance should be a reflection of organisational ethics and integrity, and so too a company’s strategy, decision-making and organisational systems (Camilleri, 2018, p. 3).
The importance of effective corporate governance (on paper and in practice) being bedded on a solid foundation of values and strategic management at corporate executive level cannot be over-emphasised (Wieland, 2006, p. 158). Furthermore, and according to a study conducted on German companies with the application of the German Ethical Culture Scale (GECS), a compliance-based approach to manage business ethics prioritises the prevention of misconduct, applying measures of control, monitoring and sanctions while an integrity-based approach aims to encourage stakeholder self-governance and responsibility (Tanner, Gangl, & Witt, 2019, p. 4). The study found that a combined implementation and monitoring is important to better predict considerably deviant behaviour (Tanner, Gangl, & Witt, 2019, p. 14).
Corporate policies and procedures present one manifestation of an employer’s efforts to connect with its employees’ moral campus and to give the employees an insight into the employer’s corporate ethical framework (Copoeru, 2012, p. 39). The ethical code of a business, in essence, formalises sets of standards and actions, against which the actions and decisions by everyone in a company (including the executive) will be measured against (Tadjudje & Labi, 2018, p. 123). Based hereon, it can be argued that the unethical behaviour of corporate employees stems not solely from the lack of morals on a personal level, but are actually encouraged by the existing bureaucratic structures (Copoeru, 2012, p. 39) and normalised ways of working. Even prior to the Wirecard scandal there was a view that the absence of business ethics among employees is often directly attributable to the low or absent business ethics standards among the executive (Rapp & Strenger, 2015, p. 14).
Corporate Leadership Has an Important Mandate
The Wirecard scandal has place renewed focus on Germany’s corporate governance rules and corporate leadership. The chairperson of the Association of Supervisory Boards in Germany was quoted to express the dire need for the modernisation of the corporate governance rules (Browne, 2020). The CFA Society Germany echoes this sentiment, adding that, on a company level, corporate leadership must strengthen corporate governance measures such as reporting, and increase the responsibility of the advisory board (CFA Society Germany, 2020). Along the same lines, compliance is important to provide the stakeholder with compact protection, however, it is the existing corporate ethics (most especially from most upper corporate echelons), together with increased executive accountability, that give life to corporate governance and the compliance process (Toebe, 2020). Ethical leadership is at the centre of it all, tying together business ethics, management and corporate governance, while acting as an example to employees across the company (Agbim, 2018, p. 30).
Recent corporate scandals are a reminder that the issues of business ethics and corporate governance are not a nice-to-have, but can be instrumental in the increased competitive advantage, growth and sustainability of all companies. Companies are central in normalising and mainstreaming relentless business ethics, solid corporate governance and business practices, all while achieving greater corporate performance and exemplary corporate citizenship (Agbim, 2018, p. 31).
Agbim, K. C. (2018). Effect of Ethical Leadership on Corporate Governance, Performance and Social Responsibility: A Study of Selected Deposit Money Banks in Benue State, Nigeria. International Journal of Community Development & Management Studies, 2, S. 19-35
Bender, R., Holtermann, F., Iwersen, S., & Schneider, K. (28. July 2020). Der Betrug bei Wirecard soll schon vor Jahren begonnen haben. Handelsblatt.
Browne, R. (29. June 2020). ‚The Enron of Germany‘: Wirecard scandal casts a shadow on corporate governance. cnbc.com (https://www. cnbc.com/2020/06/29/enron-of-germany-wirecard-scandal-casts-a-shadow-on-governance.html).
Bundaleska, E., Dimitrova, M., & Nikolovska, Z. (October 2012). Munich Personal RePEc Archive. Von Munich Personal RePEc Archive: https://mpra.ub.uni-muenchen.de/41971/1/Published_Paper_Corporate_Governance_and_SMEs_Final_03.pdf abgerufen
Camilleri, M. (2018). The Corporate Governance Reporting in the European Untion. In C. Cooper, Driving Productivity in Uncertain and Challenging Times (https://www.researchgate.net/publication/327111798_The_Corporate_Governance_Reporting_in_the_European_Union Ausg.). British Academy of Management, UK.
CFA Society Germany. (03. July 2020). Die Auswirkungen der Wirecard-Affäre. Von CFA Society Germany: https://www.cfa-germany.de/en/ blog/detail/blogArticle/418 abgerufen
Chun, J. S., Shin, Y., Choi, J. N., & Kim, M. (2013). How Does Corporate Ethics Contribute to Firm Financial Performance?: The Mediating Role of Collective Organizational Commitment and Organizational Citizenship Behavior. Journal of Management, 39(4), S. 853-877.
Copoeru, I. (2012). The Ethical Management of Ethics: Fostering ethical behaviour in corporations. In P. O‘Sullivan, M. Smith, & M. Esposito, Business Ethics: a Critical Approach – Integrating Ethics across the Business World (https://ebookcentral-1proquest-1com1008395an0723.emedia1.bsb-muenchen.de/lib/bsb/reader.action?docID=995653&ppg=49 Ausg., S. 34-46). New York: Routledge.
Enderle, G. (2015). Exploring and Conceptualizing International Business Ethics. Journal of Business Ethics, 127(4), S. 723-735. Institute of Business Ethics. (2020, July 23). What is business ethics? Retrieved from Institute of Business Ethics: https://www.ibe.org.uk/ knowledge-hub/what-is-business-ethics.html
Kish-Gephart, J. J., Trevino, L. K., Chen, A., & Tilton, J. (2019). Behavioral Business Ethics: The Journey from Foundations to Future. In D. M. Wasieleski, & J. Weber, Business Ethics (https://ebookcentral-1proquest-1com-1008395an06e5.emedia1.bsb-muenchen.de/lib/bsb/reader. action?docID=5780273&ppg=4 Ausg., S. 3-33). Bingley: Emerald Publishing Limited.
Kusumaningtias, R., Ludigdo, U., Irianto, G., & Mulawarman, A. D. (2016). Rethinking of Corporate Governance. Procedia Social and Behavioral Sciences, S. 455-464.
Rapp, M. S., & Strenger, C. (2015). Corporate Governance in Germany: Recent Developments and Challenges. Journal of Applied Corporate Finance, 27(4), S. 1-21.
Tadjudje, W., & Labi, C. (2018). Are Codes of Business Ethics Ethical? In Proceedings of the 11th International RAIS Conference on Social Sciences (https://www-1ceeol-1com-10010cds90094.emedia1.bsb-muenchen.de/search/viewpdf?id=738672 Ausg., S. 123-128). Central and Eastern European Online Library.
Tanner, C., Gangl, K., & Witt, N. (July 2019). The German Ethical Culture Scale (GECS): Development and First Construct Testing. Frontiers in Psychology, 10, 1-17.
The Association of Chartered Certified Accountants. (2015). Governance for all: the implementation challenges for SMEs. Von ACCA: eagovernance-for-all.pdf abgerufen
Toebe, M. (10. July 2020). Compliance Alone Won‘t Prevent Wirecard-Like Scandals. Corporate Compliance Insights
Vazquez, P. (2018). Family Business Ethics: At the Crossroads of Business Ethics and Family Business. Journal of Business Ethics, 150(3), pp. 691-709.
Wieland, J. (2006). Business Ethics and Corporate Governance in Europe. In G. Rossouw, & A. Sison, Global Perspectives on Ethics of Corporate Governenance (https://link.springer.com/chapter/10.1057/9780312376192_12#citeas Ausg., S. 157-174). New York: Palgrave Macmillan.