What we often declare loudly, we appreciate a little, apply even less. Governance and ethics would fall in this category. How often do most of us talk glibly about the significance of good governance and never lose an opportunity to wax eloquent on the importance of being ethical. But do we always practice what we profess in these areas? Do we realise that the two are intricately intertwined like the yarn of a cloth?

If these are separated, the cloth will cease to exist and all that we will be left with are bits and pieces of yarn.

The year 1992 was early days for corporate governance. These two words were just catching the headlines of the international press. The Cadbury Committee was appointed, the Code of Corporate Governance was published in the UK and SEBI just got statutory powers.

In those early days, corporate governance was treated as the system of rules, practices, and processes by which a company, managed by its board of directors, is directed and controlled; it overarched the people, purpose, processes and performance of the company.

Beyond corporate law

Corporate governance evolved and by the time SEBI’s NR Narayana Murthy Committee Report on Corporate Governance was published in 2003, it was clearly understood that corporate governance went beyond corporate law. Fulfilment of the requirements of law is a necessary but not a sufficient condition to meet its fundamental objective of ensuring the board’s commitment to manage the company transparently to maximise long-term shareholder value, in whatever manner that value may be arrived at.

Forging the relationship between ethics and governance was essential for corporate governance to play effectively, its intended role in an organisation. But was this merely an academic statement, or widely believed then and now to have practical validity?

Ethics is concerned with the code of values and principles that enables a person to make a rational choice between alternative courses of action on the basis of right and wrong. This choice is not as simple as it sounds, because, there are always conflicting interests of the parties, intermingling with the self-interests of the managers, which often further complicate matters. Ethical dilemmas sprout, making decision-making difficult. Managers are supposed to keep the long-term interest of the organisation in view, keep self-interest aside, and make decisions based only on principles influenced by the values, context, culture and the belief system of the organisation. But do they always?

The culture and mindset of management are the two key sources from which corporate governance flows. These two cannot be dictated by any regulatory framework; a regulatory framework can only serve as a mere enabler in the process. Corporate governance is all about openness, integrity and accountability. A regulatory framework can only provide a common framework for all companies to ensure common standards. It is the “form”. But it is in the “substance” that the mindset and ethical standards of management are discernible. Is this well-understood across all organisations?

Culture in an organisation takes time to develop. Good culture takes more time to set, bad culture spreads very fast. In life, as well as in business, there are bound to be challenges.

The naturally confronting question is whether one would prefer to be expedient and choose corruption to overcome many of the challenges, which will be like riding a tiger, or, be willing to carry the cross and be firm on one’s beliefs and convictions.

One difficulty with ethics is lack of clarity of understanding of what ethics is, for unlike corporate governance which can be defined within the available frameworks, and general regulations around it, ethics eludes definability. Nor can ethics at all or ever be a matter of calculation.

The good of all

In his book The Human Cycle, Sri Aurobindo says: “The good of others and most widely the good of all is one ideal aim of ethical practice; it is that which the ethical man would like to effect, if he could only find the way and be always sure what is the real good of all.. ….

But this does not help to regulate our ethical practice, it is one of the many considerations by which we can feel our way along the road which is so difficult to travel.

Good, not utility, must be the principle and standard of good; otherwise we fall into the hands of that dangerous pretender expediency, whose whole method is alien to the ethical”.

“Application of ethics would vary with the individual nature, the habit of mind, individual’s outlook on the world. The law of nature of the ethical being is the pursuit of good; not the pursuit of utility. Hence a safe rule for the ethical man, is to stick to his principle of good, his instinct for good, his vision of good, his intuition of good and to govern by that his conduct.”

There are examples of sustainable and growing businesses in India and elsewhere, which have realised that ethical leadership is good for businesses, as the organisation is then seen to conduct its business in line with the expectations of all stakeholders.

The writer joined SEBI at its inception in 1988 and was its Executive Director between 1992 and 2006. He was involved with NR Narayana Murthy on corporate governance

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