GOOD GOVERNANCE & SOCIAL RESPONSIBILITY What is an ORGANIZATIONAL THEORY?

● It is the sociological study of the structures and operations of social

Good Governance organizations, including companies and bureaucratic institutions.
It refers to the effective and responsible management of an ● It is also concerned with understanding how groups of individuals
organization, a country, etc. which includes considering society’s needs in behave, which may differ from the behavior of an individual. The
the decisions it makes. It means that processes and institutions produce behavior organizational theory often focuses on is goal-directed.
results that meet the needs of society while making the best use of ● It covers both intra-organizational and inter-organizational fields of
resources at their disposal. Good governance is perceived as a normative study.
principle of administrative law, which obliges the State to perform its
functions in a manner that promotes the values of efficiency, no SIX (6) ORGANIZATIONAL THEORIES
corruptibility, and responsiveness to civil society. In international Social and behavioral scientists have developed various theories to
development, good governance is a way of measuring how public describe the correct way to understand and approach the key to an
institutions conduct public affairs and manage public resources in a organization's productivity and success. These organizational theories
preferred way discuss different ways that managers and supervisors may address their
leadership responsibilities to yield the most productive and efficient
Social Responsibility results. The six primary organizational theories include:
It is an ethical focus for individuals and companies that want to
take action and be accountable for practices that benefit society. It's 1. Classical Theory
become increasingly important to investors and consumers who want to It can address the primary aspects of a business's formal
put their money into or purchase products from companies that take steps organizational structure. This theory discusses how to divide up
to contribute to the welfare of society and the environment. professional tasks most efficiently and effectively. Classical theorists pay
particular attention to the professional dynamics and relationships within
Understanding The Organizational Environment: an organization and how these relationships may impact the company's
➢ Organization function and production.
➢ Organizational Theory The underlying purpose of this theory is to help businesses create
➢ Organizational Structure Objective Types Levels the most beneficial structures within a company that can then help the
➢ Factors Affecting the Organizational Structure Selection in organization accomplish its goals. The four principles of the classical
Multinational Corporations theory include:
● Division of labor: This principle argues that the production of a
What is ORGANIZATION? commodity splits into various divisions of manufacturing, and the
● An organization is an entity such as a company, institution, or people work within each division according to their area of
association, comprising one or more people and having a particular specialization. This process results in maximum product output
purpose. with minimum expenses.
● It can also refer to such an entity's administrative and functional ● Scalar and functional processes: The scalar process deals with
structure. a company's vertical growth, meaning the relationships between
● The term can encompass businesses, clubs, and other groups business leaders and their employees. This means that
formed for specific goals. professionals in management instruct their employees, and
employees carry out the actions.
● Structure: The principle of structure describes patterns of
professional behavior that lead to the accomplishment of the
 organization's goals. Structure is a tool that may facilitate there is no one right way to make a decision. Herbert A. Simon, a primary
relationships between all aspects of the company or business. contributor to this theory, found that while people make business decisions
● The span of control: The span of control means attributing the at all levels of an organization, employees working at higher levels make
appropriate numbers of employees to a supervisor so they can the most valuable or impactful choices. This theory argues that the ideal
implement the principles of coordination, planning, motivation, and decision or choice may differ from one organization to another, so choices
leadership. This is about assigning the maximum number of are dependent on various internal and external factors. This means that
employees to a manager while also allowing them enough time the success of a business is contingent on the decisions made by the
and support to lead their staff. organization's leaders. Contingency theorists believe that management is
responsible for analyzing business situations and then acting accordingly
2. Neo-classical Theory to address any issues or challenges.
Beginning with the Hawthorne studies in the 1920s, the
neo-classical theory focuses on the emotional and psychological 5. Motivation Theory
components of peoples' behavior in an organization. Sociologists and The motivational theory includes the study of what drives and
psychologists found topics like leadership, morale, and cooperation inspires members of an organization to work toward their professional
contribute to professional habits and behaviors. This theory argues that a goals. Theorists who support this approach argue that employees perform
sense of belonging and social acceptance is an important aspect of their job duties accurately and productively when management knows how
positive performance in the workplace. This means that effective leaders to motivate them correctly. This may require business leaders to
understand how the group dynamics may contribute to the success of the thoroughly understand their employees' behavioral patterns and
organization overall. Business leaders may implement systems and preferences to recognize the most beneficial way to support them. The
strategies to improve the interpersonal skills of their employees and goal of this is to increase company productivity on the basis that
facilitate meaningful professional connections through motivation, appropriately encourages employees to perform more efficiently, thus
counseling, and communication. increasing production and profit. Managers may consider intrinsic and
extrinsic factors that can impact their employees' feelings and experiences
3. Modern Theory to develop effective systems and managerial strategies.
Also called modern organizational theory, includes multiple
management development approaches. This theory considers interactions 6. Open Systems Theory
between people within an organization and the surrounding environment, It is a concept that argues that an organization's environment
as well as the interpersonal interactions between members of the influences it, and understanding the impact of this influence may help
organization. Theorists based this approach on systems analysis and used managers develop more effective leadership strategies. Theorists
both quantitative and behavioral sciences to develop it. This means that categorize the environmental factors that impact an organization as
professional leaders who adopt this theory may use statistical and specific or general. Specific factors may include the vendors or distributors
mathematical information to make business decisions while also that a company works with, industry competitors, or government agencies
considering the satisfaction and happiness of their employees. Managers that control or interact with production and regulation. Alternatively,
who implement this approach may require an in-depth knowledge of their general factors include four primary aspects that occur because of the
employees' behaviors to implement programs that further their productivity geographic location of the organization. These aspects include:
and professional development. ● Economic conditions: The geographic location of a business can
have a great impact on the company's ability to grow and remain
4. Contingency Theory successful because of local economic trends and events, including
Contingency theory, also called decision theory, views recessions and economic upswings.
organizations as a structure composed of choice-makers, and argues that
 ● Cultural values: The cultural values of a community can influence hierarchy, while decentralized structures delegate
customers' viewpoints and standards. This may influence whether decision-making to lower levels of the organization.
they support your business or organization, and business leaders ● Span of Control: The concept of span of control pertains to the
may use this theory to adapt to local cultural ethics. number of subordinates or employees that a manager directly
● Education systems: Areas with strong education systems may be oversees. A wide span of control indicates fewer levels of hierarchy
ideal for businesses that are in the technology industry or other and more autonomy for employees, while a narrow span of control
companies that may rely on employees with extensive academic involves more layers of management and closer supervision.
training. ● Formalization: Formalization refers to the degree of
● Legal consideration: The legal and political environment, standardization and codification of rules, procedures, and
including the taxes and regulations on business operations, may processes within the organization. Highly formalized structures
impact the stability and security of an organization. This may have strict rules and procedures, while less formalized structures
influence its ability to remain productive and successful. allow for more flexibility and discretion.
● Common types of organizational structures include:
What is ORGANIZATIONAL STRUCTURE? ➢ Functional Structure: Organized around specialized
Organizational structure is defined as the framework of roles, functions or departments, such as marketing, finance, and
responsibilities, authority relationships, and communication channels operations.
within an organization. It defines how tasks are divided, coordinated, and ➢ Divisional Structure: Organized by product lines,
controlled to achieve the organization’s objectives effectively. geographic regions, or customer segments.
Organizational structure establishes the hierarchy of decision-making, ➢ Matrix Structure: Combines functional and divisional
clarifies reporting relationships, and outlines the flow of authority and structures, creating dual lines of authority and reporting
communication throughout the organization. relationships.
➢ Flat Structure: Few levels of hierarchy with a wide span of
KEY COMPONENTS of organizational structure include: control, promoting autonomy and collaboration among
● Hierarchy: Organizational structure typically includes levels of employees.
hierarchy, from top management to lower-level employees. This ➢ Hierarchical Structure: Traditional pyramid-shaped
hierarchy establishes reporting relationships and defines the chain structure with multiple levels of management and clear
of command within the organization. reporting relationships.
● Departments and Units: Organizations are often divided into
functional departments or units based on specialized functions or Overall, organizational structure plays a critical role in shaping how
areas of expertise, such as finance, marketing, operations, and work is organized, coordinated, and managed within an organization. It
human resources. provides a framework for allocating resources, making decisions, and
● Roles and Responsibilities: Each position within the organization achieving strategic objectives effectively.
has defined roles, responsibilities, and authority levels. This clarity
helps employees understand their duties and expectations within TYPES OF ORGANIZATIONAL STRUCTURE
the organization. There are several types of organizational structures, each with its
● Centralization vs. Decentralization: Organizational structure may own advantages, disadvantages, and suitability for different types of
vary in terms of centralization or decentralization of organizations and industries. Here are some common types:
decision-making authority. In centralized structures,
decision-making authority is concentrated at the top of the
1. Functional Structure 4. Flat Structure
➢ Organizes employees into functional departments based on specialized ➢ Has few levels of hierarchy and a wide span of control, with
functions, such as marketing, finance, operations, and human resources. decentralized decision-making and greater autonomy for employees.
● Advantages: Efficient use of expertise, clear career paths, and ➢ Flat structures promote collaboration, innovation, and quick
economies of scale within each function. decision-making, as there are fewer layers of management.
● Disadvantages: Communication barriers between departments, ● Advantages: Faster communication, empowered employees, and
lack of focus on overall organizational goals, and potential for a silo reduced bureaucracy.
mentality. ● Disadvantages: Potential for lack of clear direction or oversight,
A silo [ˈsīlō] mentality is an unwillingness to share information or difficulty in maintaining consistency across functions, and limited
knowledge between employees or across different departments within a career advancement
company. This commonly creates low morale, negatively impacts opportunities.
workflows, and ultimately adversely affects the customer experience.
5. Hierarchical Structure
2. Divisional Structure ➢ Traditional pyramid-shaped structure with multiple levels of
➢ Divide the organization into semi-autonomous divisions or units based management and clear reporting relationships.
on products, geographic regions, customer segments, or markets. ➢ Each employee reports to a single supervisor, and decision-making
➢ Each division operates as a separate entity with its own functional authority flows from top management down through the organization.
departments (e.g., marketing, finance) to support its specific needs. ● Advantages: Clear lines of authority and responsibility, well-defined
● Advantages: Allows for focus on specific markets or products, career paths, and centralized decision-making.
facilitates adaptation to local conditions, and promotes innovation ● Disadvantages: Slow communication and decision-making
and responsiveness. processes, potential for bureaucratic red tape, and limited flexibility
● Disadvantages: Duplication of resources and functions across to respond to changes in the external environment.
divisions, potential for competition and conflict between divisions,
and coordination challenges. 6. Network Structure
➢ Relies on external partnerships, alliances, and outsourcing
3. Matrix Structure arrangements to perform key functions or deliver products and services.
➢ Combines elements of both functional and divisional structures, ➢ The organization acts as a network of interconnected entities,
creating a dual reporting system where employees report to both leveraging external expertise and resources to achieve its objectives.
functional managers and project or product managers. ● Advantages: Access to specialized expertise and resources,
➢ Matrix structures are often used in project-based organizations or flexibility to scale operations up or down, and cost savings through
industries requiring cross-functional collaboration. outsourcing.
● Advantages: Flexibility to allocate resources based on project ● Disadvantages: Dependency on external partners, coordination
needs, enhanced coordination and communication between challenges, and potential loss of control over key processes.
functions, and efficient use of specialized expertise.
HIERARCHAL ORGANIZATIONAL STRUCTURE
● Disadvantages: Complexity in reporting relationships, potential for It is a traditional pyramid-shaped arrangement of authority and
power struggles and conflicts, and increased administrative responsibility within an organization. In this structure, employees are
overhead. organized into layers or levels of hierarchy, with each level having a
designated level of authority and reporting relationships.
 It is a way of organizing a group of elements or people according to ● Clear Career Paths: Hierarchical structures often offer clear
a chain of command. A hierarchy has one element or person, called the career advancement paths, with opportunities for promotion as
apex or hierarchy, that is superior to all of the other elements or people in employees move up through the ranks.
the group. No element or person is superior to itself, and the subordinates
follow the orders of their superiors. A hierarchical structure is common in DISADVANTAGES of a hierarchical organizational structure include:
many organizations, such as companies, governments, and religions. ● Bureaucracy: Hierarchical structures can be bureaucratic and
slow-moving, with decisions and information needing to pass
KEY FEATURES of a hierarchical organizational structure include: through multiple levels of management before action is taken.
● Clear Chain of Command: Authority flows from top management ● Limited Flexibility: The rigid nature of hierarchical structures may
down through the organization in a clear and well-defined chain of limit an organization’s ability to adapt quickly to changes in the
command. Every employee is accountable to a direct supervisor to external environment or respond to customer needs.
whom they submit reports. ● Communication Barriers: Communication may be hindered by
● Multiple Levels of Management: The structure consists of the strict hierarchy, with information getting filtered or distorted as it
multiple levels of management, typically including top-level moves up and down the chain of command.
executives (such as CEOs or presidents), middle managers, and ● Potential for Micromanagement: Middle managers may engage
frontline supervisors. in micromanagement as they oversee the work of their
● Specialization of Functions: Different functions or departments subordinates, leading to decreased employee autonomy and
within the organization are typically organized into separate levels motivation.
of the hierarchy, such as finance, marketing, operations, and
human resources. Despite these disadvantages, hierarchical organizational structures
● Centralized Decision-Making: Decision-making authority is remain common in many organizations, particularly large corporations and
concentrated at the top of the hierarchy, with top-level executives government agencies, due to their stability, clarity, and familiarity.
making strategic decisions that guide the organization’s direction However, some organizations may adopt flatter or more decentralized
and objectives. structures to overcome the limitations of hierarchy and promote agility and
● Standardized Procedures: Hierarchical organizations often rely innovation.
on standardized procedures, rules, and policies to maintain
consistency and control over operations. Organizational Structure Example
● Vertical Communication: Communication flows primarily up and 1. Top-Level Management:
down the hierarchy, with information and directives passed down ● CEO (Chief Executive Officer): Responsible for overall strategic
from top management to lower levels, and feedback and reports direction and leadership of the company. Directly oversees other
moving upward. top executives and reports to the board of directors.
● CFO (Chief Financial Officer): Responsible for financial planning,
ADVANTAGES of a hierarchical organizational structure include: reporting, and management. Oversees accounting, budgeting, and
● Clarity of Roles and Responsibilities: Clear reporting financial analysis.
relationships and lines of authority help employees understand ● COO (Chief Operating Officer): Responsible for day-to-day
their roles and responsibilities within the organization. operations of the company. Overseas production, logistics, and
● Efficient Decision-Making: Centralized decision-making can lead supply chain management.
to quicker decisions, particularly on strategic matters, as top
management has the authority to make decisions without needing
to consult lower levels of the hierarchy.
2. Middle Management: Factors Affecting the Organizational Structure Selection in
● Vice President of Sales and Marketing: Oversees sales, marketing, Multinational Corporations
and customer relations. Manages sales teams, advertising The organizational structure in multinational companies is
campaigns, and market research. influenced by various internal and external factors. Let’s explore these
● Vice President of Operations: Oversees manufacturing, production, factors:
and logistics. Manages production schedules, quality control, and 1. Economic Factors: These include market size, competitor strategies,
inventory management. and the overall economic environment. Companies need to structure
● Vice President of Human Resources: Responsible for recruiting, themselves to meet their objectives based on economic conditions.
training, and managing personnel. Manages employee relations, 2. Political and Legal Factors: Organizations must align their structure
performance evaluations, and HR with government norms and policies. Ignoring these rules can have
consequences in the future.
3. Lower-Level Management: 3. Socio-Economic Factors: Considerations such as culture, values, and
● Sales Manager (North Region): Manages sales representatives in beliefs of the society impact organizational structure. Demographics and
the northern region. Sets sales targets, monitors performance, and psychographics also play a role.
provides training and support. 4. Technological Factors: Technology influences communication flow
● Production Manager: Oversees manufacturing operations and within the structure. Quick communication between different levels affects
production staff. Ensures production schedules are met, monitors how companies organize themselves.
quality standards, and implements process improvements.
● Marketing Manager: Leads marketing campaigns and promotional Remember that each country’s unique environment shapes the
activities. Coordinates with advertising agencies, analyzes market organizational structure of multinational corporations.
trends, and develops marketing strategies.

4. Non-Managerial Employees:
● Sales Representatives: Responsible for selling company products
or services to customers. Develops leads, negotiates contracts,
and maintains customer relationships.
● Production Supervisors: Supervises production line workers and
ensures adherence to safety and quality standards. Coordinates
with the production manager to optimize workflow.
● Marketing Assistants: Assists marketing manager in executing
marketing campaigns. Prepares promotional materials, manages
social media accounts, and analyzes campaign performance.

This hierarchical organizational structure illustrates the division of

roles, responsibilities, and reporting relationships within the company.
Each level of management has its own set of duties and authority, with
clear lines of communication and supervision. While this structure provides
stability and clarity, it may also face challenges such as bureaucracy and
communication barriers.
Ethics and Business production, marketing, advertising, warehousing, insurance,
➢ Nature of Business banking, and others are all business activities.
➢ The Importance of Ethics in Business
➢ The Relationship Between Ethics and Business Business as an economic activity has very important features are
characteristics, which are the following:
The Morality in Business 1. Production or acquisition of goods
➢ Sources of Business Ethics Business is an economic activity of production and distribution of
goods and services. Every business whether small or large-scale deals
NATURE OF BUSINESS with goods and services. The goods may be produced, manufactured, or
According to Lyndall Urwick and William Glendon Hunt, “Business procured and then supplied for a cost to those who need them. The goods
is any enterprise which makes, distributes or provides any service which may either be consumer goods (cloth, books, electronics appliances,
other members of the community need and are willing to pay for it.” medicine, and others) producer goods (machinery, tools, and so on), or
services (courier or transport services).
Economic activities are those undertaken by man to earn income,
money, and wealth for his life and to secure the greatest satisfaction of 2. Generate employment
wants with inadequate and limited means. For this intention, each person The business generates employment in various sectors of the
may pursue an activity based on his interest, capacity, knowledge, and society. It is also an activity that creates utilities to satisfy human needs
training. and wants. The society gets income from businesses that bring industrial
Economic activities are classified therefore into three categories, and economic growth and development to the country.
namely:
● Profession 3. Continuous process
- an occupation carried on by professional people like doctors, Business is not a single-time operation. It is a recurring process of
lawyers, engineers, teachers, and others. They provide specialized production and distribution of goods and services. Recurrence of dealing
services in return for fees. To become a professional, a man is a must to be termed as a business. A business must be done regularly
requires specialized knowledge and professional qualifications. For to grow and achieve expected returns. A business should also constantly
instance, a doctor needs specialized knowledge in medicine; while engage in research and developmental activities to achieve competitive
a lawyer needs a law degree, and so on. advantage. A constant improvement strategy helps to boost the
profitability of the business organization.
● Employment
- a type of occupation under which one person provides his 4. Profit is the basic motive
services, physical or mental to someone else in return for whom he Profit is essential for the survival, growth, and expansion of the
gets a salary or wage. The person who employs is called an business. Behind any business, the stimulus and assurance to continue
employer and the person who is employed is called an employee the survival of the business is profit. Profit is a sign of success and failure
or worker. of business. The principal aim of a business is generally to gain the
highest possible level of profit from the manufacture and sale of goods and
● Business services. It is a return on investment or the compensation of all those
- an economic activity concerned with the production and individuals engaged in a particular business. An efficient businessman
distribution of goods and services to earn profit. It includes all tries to double and redouble his efforts and creates plans to serve the
those activities that are directly or indirectly concerned with the business community to gain more profit.
production, purchase, and sale of goods and services. So
5. Risk or uncertainty of future businesses operate for social good. Through strict control and effective
It is a reality that the future is risky and uncertain. A business supervision of the laws and rules, the government can direct businesses to
focuses on the future; hence there is always risk and uncertainty while provide satisfying good products and services to consumers.
carrying on its operations. Risk and uncertainty are always related to every
business. The estimate and management of the risk is essential to 10. Optimum utilization of resources
guarantee the success of a business organization. It is risk and uncertainty The inadequate resources are brought into optimum use by
which every businessman considers when he gets involved in a business businesses. This is to satisfy the needs and wants of the consumers. Both
activity. material and non-material resources are utilized fully to attain the
economic progress of a country.
6. Creative and dynamic
Modern business organizations have to produce creative ideas, UNDERSTANDING the RELATIONSHIP between Business and Ethics
methods, and ideas for the production and distribution of goods and
services. These organizations should come out with bright, latest, and An Ethical Culture
ingenious things and ways. With the dynamic and changing economic, The connection between business and ethics is inextricably linked.
social, and technological environment, a businessman should be A successful business can recognize and nurture the link that exists
innovative. To satisfy the increasing and ever-shifting needs of customers, between the two. Businesses that exhibit and support strong
a business must always come out with new products and services. corporate ethics standards are more successful in the long run
because they demonstrate a commitment to an expectation of moral
7. Customer satisfaction behavior. This shows a commitment to society, consumers, workers, and
The phase of business has changed and now adopts a the firm itself. It also improves a business's reputation if it becomes widely
consumer-oriented approach. Today, the vital aim of all economic activities regarded as an ethical corporation, which adds value to the organization.
is customer satisfaction. By providing quality products at a reasonable In today's global economy, the highly competitive market puts
price, a modern business can satisfy its customers. Profit is just secondary pressure on corporate executives to remain profitable and provide a
to customer satisfaction for a good businessman. When they get real satisfactory return to stakeholders. This pressure may sometimes lead
value for their purchase, customers are satisfied. Hence, customers keep to immoral actions being taken to achieve favorable results. When this
on coming back and making a lot of purchases. happens, it generally leads to a pattern that spreads across the
organization.
8. Social Activity As executives engage in unethical behavior, and maybe even
Business is also a socio-economic activity. Business and society defend it while knowing it is wrong, it gradually gets ingrained in
are mutually interdependent. Contemporary businesses operate with organizational culture. People are influenced by what they see, and a lack
social responsibility in mind toward society. In turn, to properly function of moral judgment will spread.
they need the assistance of different social groups such as investors,
employees, customers, creditors, and others by making goods and Decisions and Judgements
services accessible to different segments of the society. Indeed, It's simple to criticize "the system," but many people fail to
businesses perform a vital social role and satisfy social needs. see that "the system" is made up of decision-making individuals. The
relationship between business and ethics is inextricably intertwined, yet
9. Government control some people fail to see it.
The government has some control over the operations of business It is not appropriate to claim, "business is business," because
organizations. Rules and regulations passed by the government are making responsible (ethical) decisions is a key component of conducting
required to be followed by businesses. The government makes certain that excellent business. People demand rapid results that are based on fast
satisfaction. This might be one of the reasons why some businesses Business ethics is a form of applied ethics, which studies ethical
engage in unethical business activities. One's personal moral principles, morals, and problems that happen in the business environment.
compass influences business decisions, and when the cultural It is nothing but the integration of day-to-day morals and ethical norms into
context fosters strong moral principles and does not accept bad business and applies to all types of business.
business practices, immoral activities will decrease. Here are the features of business ethics, namely:
When businesses make unethical judgments, it can lead to faulty 1. Code of Conduct
goods, unjustified layoffs, and misleading product presentations to Business ethics is a code of conduct. It tells what to do and what
customers. While the immediate bottom lines indicate a good profit from not to do for the welfare of the society. It is the code of conduct that
immoral activities, these firms' reputations suffer in the long run. This can businessmen should follow while conducting their normal business
have a significant impact on a company's profitability over time. activities.

Adding value with ethics 2. Based on moral and social values

Good company practices begin with management establishing Business ethics is based on well-accepted moral and social values.
expectations and leading by example. The implementation of greater It contains moral and social principles of conduct for businessmen.
levels of ethical behavior inside a corporation benefits the firm in a variety This includes self-control, consumer protection, and welfare, service to
of ways. It demonstrates that strong principles have been established for a society, fair treatment to social groups, and not exploiting others.
dedication to the company's ideology and mission.
A corporation can make ethical judgments while still making a 3. Gives protection to social groups
profit. Cheating or lying adds no value to a firm and harms employee Business ethics give protection to different social groups such
morale. Employees and reputation are two extremely important assets, as consumers, employees, small businessmen, government,
and fostering a morally sound workplace for both employees and shareholders, creditors, and other stakeholders.
consumers can only help to strengthen those assets.
4. Provides basic framework
ETHICS AND MORALITY IN BUSINESS Business ethics provide a basic framework for conducting
It is basically ethics that decides whether certain actions, conducts business. It suggests legal, social, moral, economic, and cultural
and behavior are right or wrong, good or bad, moral or immoral, and just limits within which business has to be operated. Business ethics must
or unjust. In general, ethics creates the rules and standards that direct be conducted within these limits. It suggests what is good and what is bad
the proper behavior of both individuals and groups. It considers in business.
honesty of primary intention, possible would-be harm, and harmony
with customary values and rules. 5. Voluntary acceptance for enforcement
On the other hand, morals are judgments, standards, and rules of Business ethics must be voluntary. Businessmen must accept
right conduct in society. Morals provide direction to people on business ethics on their own. Business ethics must be like
acceptable behavior regarding basic values. Business owners or self-discipline. It must not be enforced by law. It should come from within
leaders can make effective decisions and strategies using their the businessmen.
understanding of values, ethics, and morals together with ethical
principles. The motivation to include ethical principles in the 6. Requires education and guidance
decision-making formation shows a willingness to encourage equality and Businessmen must be given proper education and guidance before
avoid possible ethical issues. introducing business ethics. Businessmen must be motivated to follow
ethical business practices. They must be informed about the
FEATURES of Business Ethics
advantages of using ethics. Trade Association and Chambers of The other source of business ethics is the culture. Culture is the
Commerce must play an active role in this matter. set of significant understandings that members of a community
share in common that are transferred from one generation to
7. Relative term another. It also refers to the pattern of development reflected in a
Business ethics is a relative term. That is, it changes from one society’s pattern of knowledge, ideology, values, laws, social norms, and
business to another. It also changes from one country to another. everyday rituals that differ from society to society. It is a culture that
What is considered good in one country may be taboo in another country. primarily determines what is wrong and what is right and defines certain
behaviors as acceptable and others as unacceptable.
8. Not against profit-making Culture facilitates the generation of commitment to something
Business ethics is not against fair profit making. However, it is larger than one’s self-interest. Culture encourages the members of the
against profiteering by cheating and exploiting consumers, organization to give priority to organizational goals over and above their
employees, or investors. It supports the expansion of business activities personal interests. Culture also serves as a sense-making and control
but by fair means and not through illegal activities or corrupt practices. mechanism that guides and shapes the attitudes and behavior of people.
Managers have to run an industrial enterprise on the cutting edge of
SOURCES of Business Ethics cultural experience. The tension that their actions create makes the
Basically, ethics in business is affected by three important sources business ethically more complex.
which are culture, religion, and laws of the state. Thus, there are no
uniform or totally the same standards across the globe. These three Law
factors’ places influence humans to different degrees that eventually mirror Laws are procedures and codes of conduct that are laid down
the ethics of the organization. These sources are as follows: by the legal system of the state. They are meant to guide human
behavior within the social fabric. The major problem with the law is that all
Religion the ethical expectations cannot be covered by the law and especially with
A religion is a custom and observance of a conception of what is an ever-changing outer environment the law keeps on changing but often
real and significant (for example God, Allah, the Tao, and Brahman). It is fails to keep pace. In business, complying with the rule of law is taken as
the belief that wrongdoing, vice, disillusionment, and illusion may be ethical behavior, but organizations often break laws by evading taxes,
defeated by grace, prayer, and practices. In addition, living in compromising on quality, service norms, and so on.
harmony, unity, or friendship with what is real and significant is all The legal system of any country guides human behavior in society.
part of religion. A Christian faith, for instance, may be acknowledged by Whatever ethics the law defines is binding on the society. The society
Jesus’ radical teaching about loving one’s neighbor, being a Good expects the business to abide by the law. Although it is expected that
Samaritan, loving one’s enemies, and the like. every business should be law-abiding, seldom do businesses adhere
Religion is one of the oldest foundations of ethical standards. to the rules and regulations. Law breaking in business is common such
There are numerous religions which exist across the whole world. Every as tax evasion, hoarding, adulteration, poor quality & high-priced products,
religion gives an expression of what is wrong and right in business environmental pollution, etc.
and other walks of life between the good and the bad in society.
The principle of reciprocity towards one’s fellow being is found in
all religions. Great religions advocate the inevitability of an orderly social
system and stress social responsibility to contribute to the general welfare.
With these fundamentals, each religion generates its own code of
conduct.
Culture
Corporate Governance and Ethics corporate governance was to discontinue the abusive actions of
➢ Corporate Governance entrepreneurs and owners as representatives of the company. Although it
➢ Potential Challenges in Corporate Governance is still the main concern of companies today, this concept has a new
➢ The Two Distinct Approaches to Corporate Governance position which is to gain the trust of investors and other stakeholders.
Basically, corporate governance is about harmonizing profitability and
CORPORATE GOVERNANCE AND ETHICS sustainability.
“Corporate governance is concerned with holding the balance Based on the Code of Corporate Governance, Memorandum
between economic and social goals and between individual and Circular No. 2, Series of 2002, corporate governance “refers to a
communal goals. The governance framework is there to encourage the system whereby shareholders, creditors, and other stakeholders of a
efficient use of resources and equally to require accountability for the corporation ensure that management enhances the value of the
stewardship of those resources. The aim is to align as nearly as possible corporation as it competes in an increasingly global marketplace”.
the interests of individuals, corporations, and society.” – Sir Adrian Weak governance frameworks have led to the collapse of many
Cadbury corporations around the world and here in the Philippines.

It is a fact that inside any company is a diverse group of people Some of the strategic aims of corporate governance consist
with their respective interests. Therefore, a system is required to create of:
and sustain good relationships among these people to avoid anyone being 1. Good corporate governance aims to ensure a higher degree of
cheated or exploited. Basically, this is the reason for the need to have transparency in an organization by encouraging full disclosure of
corporate governance. Technically speaking, corporate governance is transactions in the company accounts. Full disclosure includes compliance
a system of processes, policies, and rules that direct and control an with regulations and disclosing any information important to the
organization’s conduct for the good management of companies. shareholders. Transparency involves disclosure of all forms of
Corporate governance consists of the relationship between conflict of interest.
the numerous stakeholders involved and the goals for which the
corporation is directed. In modern business corporations, the chief 2. A strong corporate governance structure encourages accountability of
external stakeholder groups are shareholders, debt holders, trade the management to the company directors and the accountability of the
creditors, suppliers, customers, and communities affected by the directors to the shareholders. Through hiring independent directors, a
corporation’s activities. Internal stakeholders include the board of company aims to create good corporate governance. Any discrepancies in
directors, executives, and other employees. the company accounts or malfunctioning of the company are closely
watched by the board of directors. The board has a right to question
Corporate governance is also a process that aims to strategic decisions.
apportion corporate resources in a way that enhances value for all
stakeholders such as the shareholders, investors, employees, 3. A corporate governance structure ensures equitable treatment of all the
customers, suppliers, environment, and the community in general. It shareholders of the company. However, all shareholders deserve
also holds those in control to account by evaluating their decisions equitable treatment, and this equity is ensured by a good corporate
on transparency, inclusivity, equity, and responsibility. The World governance structure in any organization.
Bank defines governance as the exercise of political authority and the use
of institutional resources to manage society’s problems and affairs. 4. Corporate governance allows firms to evaluate their behavior before
The main objective of corporate governance is to put an end they are scrutinized by regulatory bodies. Companies with a strong
to the abusive somehow unlawful and improper activities of some corporate governance system are better able to limit their exposure to
entrepreneurs and business owners. At first, the main objective of regulatory risks and fines. An active and independent board can
successfully point out the loopholes in the company operations and state or federal law, face substantial fines from regulatory
help solve issues internally. agencies, and suffer reputational damage to the public.
5. The main objective of corporate governance is to protect the long-term ● Accountability issues - Accountability is necessary for effective
interests of the shareholders. Companies with strong corporate corporate governance. From the top-level executives to lower-tier
governance structures are seen to have higher valuation premiums employees, each level and division of the corporation should report
attached to their shares. This shows that good corporate governance and be accountable to one another as a system of checks and
is perceived by the market as an incentive for shareholders to invest balances. Above all else, the action of each level of the corporation
in the company. is accountable to the shareholders and the public. Without
accountability, one division of the corporation might endanger the
POTENTIAL CHALLENGES IN CORPORATE GOVERNANCE success of the entire company or cause stockholders to lose the
Good governance is an ideal that is difficult to achieve in its totality. desire to continue their investment.
Corporate governance is the term used to describe the balance ● Transparency - In order to be transparent, a corporation must
among participants in the corporate structure who have an interest in accurately report its profits and losses and make those figures
the way in which the corporation is run, such as executive staff, available to those who invest in the company. Over-inflating profits
shareholders, and members of the community. Corporate governance or minimizing losses can seriously damage the company’s
directly impacts the profits and reputation of the company, and having poor relationship with stockholders in that they are enticed to invest
policies can expose the company to lawsuits, fines, reputational damage, under pretenses. A lack of transparency can also expose the
and loss of capital investment. company to fines from regulatory agencies.
● Ethics violations - Members of the executive board have an
Here are the common pitfalls that corporate governance ethical duty to make decisions based on the best interests of the
policies should avoid. stockholders. Further, a corporation has an ethical duty to protect
● Conflict of interest - Avoiding conflict of interest is vital. A conflict the social welfare of others, including the greater community in
of interest within the framework of corporate governance occurs which they operate. Minimizing pollution and avoiding
when an officer or other controlling member of a corporation has manufacturing in countries that do not adhere to similar labor
other financial interests that directly conflict with the objectives of standards are examples of a way in which corporate governance,
the corporation. For example, a board member of a solar company ethics, and social welfare interlink.
who owns a significant amount of stock in an oil company has a ● Governance standards - A board should always produce
conflict of interest because, while the board he serves on unbiased rules and policies and disseminate those standards in the
represents the development of clean energy, they have a personal business. However, often some hard-headed managers may
financial stake in the success of the oil industry. When conflicts of sabotage good corporate governance at the operational level. This
interest are present, they deteriorate the trust of shareholders and negative act may leave the company unprotected against law
the public while making the corporation vulnerable to litigation. violations and damage to stakeholders’ reputations. Hence, there
● Oversight issues - Effective corporate governance requires the must be a clear enforcement mechanism consistently applied as a
board of directors to have substantial oversight of the company’s way to check and balance the actions of the operational managers.
procedures and practices. Oversight is a board term that ● Short-termism - To implement effective good corporate
encompasses the executive staff reporting to the board and the governance, it must need boards that can manage the company in
board’s awareness of the daily operations of the company and how continuing years to produce sustainable value for the company.
its objectives are being achieved. The board protects the interests This is problematic since there is a definite period for the directors
of the shareholders, acting as a check and balance against the to sit as part of the board. The result of the election would
executive staff. Without this oversight, corporate staff might violate determine whether directors would remain if re-elected or to leave
 if not given the chance for another term. The short tenures could - Investor confidence in the stock market might be improved
deprive the board of long-term oversight and vital expertise. if all stock markets companies are required to comply with
● Diversity - Based on good judgment and practicality, boards recognized corporate governance rules.
should possess a good combination of skills and perspectives to ● Disadvantages:
ensure the success of any organization. However, only a few - The same rules might not be suitable for every company,
boards are very observant of this mix and instead only have because the circumstances of each company are different.
minimal standards such as age, gender, and race. The roles of the A system of corporate governance is too rigid if the same
boards are tough particularly because they need to generate rules are applied to all companies.
strong decisions, hence there must be a good mix of them inside - There are some aspects of corporate governance that
the boardroom. cannot be regulated easily, such as negotiating the
remuneration of directors, deciding the most suitable range
The TWO DISTINCT APPROACHES to Corporate Governance of skills and experience for the board of directors, and
Corporate governance is all about monitoring and controlling assessing the performance of the board and its directors.
management decisions and strategies all to the best interest of the
company’s stakeholders. 2. Principles-Based Approach
As a result of many companies going bankrupt in winding up Principles-based approach is grounded on the outlook that a
despite producing a healthy financial statement, Codes for corporate distinct set of rules is unfitting for every company. Circumstances of a
governance were established, and companies were expected to comply company can change every now and then.
with them. In a principles-based jurisdiction, legal force applies to the
There are two approaches to corporate governance regulations provisions of company laws, but additional listing rules are enforced
and companies can decide which of these principles to apply. on a “comply or explain” basis. If there is a reason why there is
1. Rules-Based Approach non-compliance, there should be an explanation for the shareholders.
In a rules-based, all provisions are legal rules, supported by Here are the common characteristics of a principle-based
law which attracts punishment from the law, if there is failure to approach, which are:
comply. Here are the usual characteristics of a rules-based approach, a. activities of entities must address major principles set out in codes
namely: of best practice
a. approved set of requirements b. not merely a box-ticking application
b. fast approach of ensuring conformity c. more demanding to avoid than rules- based approach
c. implements a checklist method d. easy to observe that entity is complying
d. clear difference between conformity and non-conformity e. directors are necessary to work in the entity’s best interest
e. easy to observe that entity is conforming f. more stretchy, and therefore better able to cope with different
f. lessening of flexibility on the part of management and auditors situations
g. challenging to set rules entirely for all situations g. easier defense for obvious breach principles
h. likely to misunderstand rules h. but principles may be construed in different ways
i. similar rules apply to all, whatsoever their sizes are
Principles are very beneficial in consenting organizations to
● Advantages: tailor-fit their interpretations of how best to apply new practices for the
- Companies do not have the choice of ignoring the rules. distinctive situations and operational realisms of their organization and
- All companies are required to meet the same minimum industry. This must therefore result in better, more applicable governance
standards of corporate governance. actions in comparison to minimum obedience with a set of basic rules.
 THE AGENCY THEORY There are two situations which make efforts on resolving agency
The relationship between the agents and principals in the business conflicts all the more vital, which are:
is being examined in an agency theory. The agent represents the 1. Different risk desire
principal in a particular business transaction and takes decisions on Shareholders and managers differ in the level of risk they are
behalf of the principal in an agency relationship. Any agent is eager to assume. Shareholders do not participate the daily operations of
expected to disregard his self-interest in order to represent the best the company. On the other hand, managers are more futuristic and willing
interests of the principal. to assume greater risks because of their closeness to important
In a corporation set-up, the top executives are usually elected by information. The shareholders are intensely interested in increasing the
shareholders. The shareholders are the true owners of the company. An present and future value of their investments, whereas the top executives
agency relationship exists between the shareholders and the top are highly concerned in the sustainable growth of the company. Therefore,
executives who should act for the best interests of these owners. Any these differences in their interests and approaches form a sense of
incongruity among the desires of these two parties may cause suspicion and disagreement.
inefficiencies and financial losses leading to principal-agent problem.
2. Super self-centered executives
Using agency theory incentives could be design appropriately This situation is when the managers are just interested in providing
by identifying what best motivates agent to act. On the other hand, short-term performance to the owners to obtain their compensation hikes.
incentives that boost wrong behavior should deleted. Only those Generally, this is more common yet very risky condition.
incentives and rules that discourage moral threat should be maintained.
Developing better corporate policy for business could only be possible The AGENCY THEORY in CORPORATE GOVERNANCE
through knowing precisely the mechanisms that create problems. Agency theory in corporate governance refers to the
A very good example of agency theory is the manner in which relationship between shareholders and directors/management.
a government works. People elect their political representatives to ● Shareholders, as the true owners of the corporation, elect
manage the country in a manner that take advantage of their executives to act on their behalf. The theory aims to ensure that
interests. Normally, representatives from various political groups make decisions are made in the owners' interest. It is part of the broader
promise of changes to voters. However, most of the times upon topic of corporate governance, addressing the challenge of
assumption of office the masses find themselves cheated by their elected directors controlling a company while shareholders own it.
candidates who would turn out to be corrupt officials. In this case, the ● Agency theory is commonly used to understand executive
voters stand as principals who elect the government officials to perform as incentive alignment, board monitoring, and control of top
agents. managers.

The employees and employers of an organizations also display a THE STEWARDSHIP THEORY
common example of agency theory. The employees are employed to A steward is defined as someone who protects and take care of
work based on the objectives of the company. However, with the needs of others. Under stewardship theory, company top
increasing figure of corporate scandals showed that the relationship executives protect the interests of the owners or shareholders and
between employees and employers is not what is supposed to be. make decisions on their behalf. Their sole objective is to create and
Enormous financial and reputational harm are often caused by those maintain a successful organization so the shareholders prosper.
employees who have worked against the ethics of the organization. Often, Companies that embrace stewardship place the Chief Executive
these losses due to unethical employee’s practices may be irremediable. Officer (CEO) and Chairman responsibilities under one executive, with a
board comprised mostly of in-house members. This allows for intimate
knowledge of organizational operation and a deep commitment to business, this set-up helps to obviously know who is really in-charge or
success. responsible.
It is requisite that stewardship governance takes a Chief Executive
While profits energies any business, some companies may Officer (CEO) who is dependable and prepared to set his personal
consider themselves part of something greater. Stewardship theory holds interests only secondary for the interest of the company. Stewardship
that ownership does not actually own a company but simply hold it in trust. governance entails choosing the right personality that would lead the
This means that profit takes a second priority after meeting a company’s boardroom of the company.
design of honoring a founder’s primary vision. Often manager’s seek other
ends besides financials which could be in the form of a sense of worth, The stakeholder’s theory recognizes the needs of every segment
altruism, a good reputation, a job well-done, a feeling of satisfaction and a that comprises the company which consists of but not limited to the
sense of purpose. employees, suppliers and business partners with equal importance.
In the stewardship theory, managers innately seek to do a Here are some significant applications of stewardship theory in
good job, maximize company profits and bring good returns to corporate governance:
stockholders because they feel a strong duty to the company. They a. On Business - A company dedicated to a higher purpose will
do this essentially for the interest of the company and not for their attract customers who believe in similar purpose. On the other
own financial interest. Managers are not considered isolated hand, customers cautiously compare how the company truly
individuals but rather part of the company. Usually, the ego and operates against what it talks about stewardship in its corporate
sense of worth of managers are combined with the image of the governance. Any gap identified between action and talk will create
company based on the stewardship theory. a big impact on the customers.
There are several models that a company may use to operate b. On Employees - Company’ stewardship attitude can be clearly
using stewardship theory, which could be in the form of: seen at an instant by employees on the way they are treated.
a. operating with as little negative impacts as possible against the Employees may possibly have higher expectations when a
environment or the Earth, company operates with profitability as the motive. Although,
b. supporting human and animal rights; employees with identical vision would prefer to stay with a
c. abstaining from using products made a sweatshops (business company and perform excellently to attain company’s goals though
employing workers at low wages, for long hours, and under poor they may have higher pay in other companies. When employees
conditions); sense that they are part of something greater, a strong and
d. renouncing products testing on living subjects; and concrete practice of stewardship improves drive and determination.
e. honoring the belief of servant leadership c. On Customers - Likewise, just like employees, when customers
sense that they are part of something greater, they may likely
Often these models mentioned above are likely to be subjective, stay connected with businesses that are stewardship-driven.
which give management a bit of headache in identifying the borderline Even if the prices for goods and services become higher, they
concerning socially responsible and irresponsible behavior. would remain loyal to these businesses. Yet, stewardship
standpoint may also dismay some possible customers by mistake.
The STEWARDSHIP THEORY in CORPORATE GOVERNANCE This situation would likely happen when the cause is not favorable
Clearly, the main purpose of the stewardship theory of to customers or when management becomes strident about their
governance is to satisfy shareholders. With a single leader, a strong beliefs.
channel is formed to convey business requirements to the
shareholders and vice versa. During difficult situations faced by the
 THE STAKEHOLDER THEORY endure should be proportionate to the benefits they have earned in the
Stakeholder theory states that the purpose of a business is to company. Not all these costs are purely financial, so they may be
create value for wider group stakeholders other than just demanding to measure.
shareholders. This theory considers the corporate environment as a
network of interconnected groups, all of which are required to be pleased 5. Agency principle - This principle reflects on the manager of a company
to sustain the health and success of the company in the long-term. as its agent and hence has responsibilities to the stakeholders and also
A stakeholder refers to any individual or group of individuals who the shareholders.
can affect or be affected by any actions done by a business. It consists of
those who work in its stores, those who work and live close to its factories, 6. The principle of limited immortality - This principle ensures the
those who do business with it, and even of competitors, as the company success of the company and its owners similarly for a longer time period.
may form the setting in its industry. Although it is impossible for a company to be immortal, but it must and can
remain in existence for a length of time.
The stakeholder theory was coined originally by Edward
Freeman as he recognized such as an important element of In stakeholder’s theory, a company must not lose sight of
Corporate Social Responsibility (CSR). Corporate Social each person involved in its success. For, instance a company should
Responsibility is a concept that places bigger responsibilities on always treat its employes well. Projects that may have harmful effects on
companies in the form of economic, legal, ethical or even communities around a business location should not be continued or the
philanthropic. Freeman’s theory advocates that a company’s genuine company may likely fail. Any company that desires to survive and continue
success comes from satisfying all its stakeholders, not only those to have positive growth should not ignore its stakeholders instead they
who might gain profit from its stock. must be completely satisfied.
Here are the categories of stakeholders inside the company,
According to Freeman, there are six principles that must direct the namely:
connection between the stakeholders and the corporation, which are: ● ORGANIZATIONAL Stakeholders
1. The principle of entry and exit - Based on the principles, there must Organizational stakeholders are those people that are
be clear-cut and transparent rules and policies such as hiring employees present inside the company. They have a direct interest in how the
and terminating their employment. company is robust and healthy to seek advantages and benefits
from it. The staff and employees as well as the stockholders and
2. The principle of governance - This principle considers the manner of the managers are the main stakeholders here. All these people are
modifying the rules about the relationship between the stakeholders and interested in the smooth operations of a company which could be
the company. supported by a CSR policy.
● ECONOMIC Stakeholders
3. The principle of externalities - This is about how a group that does In this group, the customers in addition to bankers,
not gain from the actions of the company has to undergo some problems creditors and suppliers are the most important stakeholders. These
because of the said actions. Additionally, it suggests that anybody who people function as the essential boundary between the company
has to shoulder the costs of other stakeholders has the right to turn into a and the bigger societal environment. Customers are regarded as
stakeholder too. Somebody who is affected by a business develops into a very important because without their loyal customers a company
stakeholder. may not even exist.
In modern businesses, creating a loyal and long-term
4. The principle of contract costs - Each group to a contract should relationship with customers should be the primary task of a
either endure identical amounts when it comes to cost or the cost, they company. This is the reason why some companies establish CSR
 policy, firstly the nurture customers’ loyalty and secondly to 3. Role and responsibilities of the board - The board requires adequate
differentiate its brand from the rest. Identifying itself as a valuable pertinent skills and understanding to appraise and challenge management
company to customers is vital particularly to those companies in performance. It also needs acceptable size and suitable levels of
the mass-consumer field. objectivity and commitment.

● SOCIETAL Stakeholders 4. Integrity and ethical behavior - in selecting corporate officers and
These stakeholders regulate the business setting under board members one of the fundamental requirements is integrity.
which the companies function. Government agencies, regulators, Companies have to fashion a code of conduct for their directors and
communities and the environment itself are the major players here. executives that encourages ethical and accountable decision making.
Obviously, a company is required to follow the laws and to respect
certain issues the society is involved. A company will not go wrong 5. Disclosure and transparency - Companies must explain and make
in its business dealings when it has a good relationship with these transparent to the public the roles and responsibilities of board and top
stakeholders. management in order to offer stakeholders with a level of accountability.
They should also write and implement distinct procedures to freely
The STAKEHOLDER THEORY in CORPORATE GOVERNANCE authenticate and protect the truthfulness of the company’s financial
Stakeholder theory states that the purpose of a business is to reports. There should be timely and balance release of substantial matters
create value for wider group stakeholders other than just shareholders. about the company so that investors are sure to receive clear and factual
This theory considers the corporate environment as a network of information.
interconnected groups, all of which are required to be pleased to
sustain the healthy and success of the company in the long-term. There is an assurance of good corporate governance following
A stakeholder refers to any individual or group of individuals who these principles that is accommodating to all the needs of all the
can affect or be affected by any actions done by a business. It consists of stakeholders of the company.
those who work in its stores, those who work and live close to its factories,
those who do business with it, and even of competitors, as the company
may form the setting in its industry.

There are certain general principles around which businesses

are expected to operate, which are:
1. Rights and equitable treatment of shareholders - Shareholders have
certain rights which a company must respect. They should be permitted to
use these rights. A company can help shareholders apply their rights by
openly and effectively communicating information and by inspiring
shareholders to actively partake in general meetings.

2. Interests of other stakeholders - Companies must know that they

have legal, contractual, social, and market-driven responsibilities to
non-shareholder stakeholders, such as the employees, investors,
creditors, suppliers, local communities, customers, and policy maker.