Accountability
First and foremost in corporate governance is the strict adherence to business ethics on a professional level. The figure highlights the primary responsibilities of corporate managers; the upper left corner—accountability—is of particular significance. Understanding the rules and regulations in place, along with societal and personal expectations of ethical actions, is an absolutely critical and fundamental concern for all managers. The complexities and responsibilities of running a business and managing employees is the first priority for managers, as it holds the highest repercussions, both personal and fiscal, for all parties involved.
Economist Milton Friedman makes an insightful observation when he states "...the only entities who can have responsibilities are individuals...A business cannot have responsibilities." Though this sounds like common sense, it is a fact often overlooked that the only parties capable of acting ethically are those in charge. Furthermore, ethics often contrasts with the basic premise of capitalism and the demands of shareholders: profitability. Therefore, the most difficult decisions in corporate governance—those at the ethical level—must be made through the more complex assessment of societal, corporate, and personal values.
Legal Foundations
At its most basic, ethical behavior can first be derived via the laws, rules, and regulations of the country in which a business operates. In the United States, workers are imbued with very specific rights regarding the risks they take, the hours they work, the breaks they deserve, and the benefits they are provided. Managers are the responsible parties in ensuring these are delivered to the employees in an equitable and legal way. When working over 40 hours a week, hourly employees are entitled to overtime pay. When working long shifts, employees are entitled to breaks. When working in dangerous conditions, employees are entitled to protective gear and training.
At their core, these regulations approach the fundamental dissonance alluded to above: profit-maximizing behavior as it contrasts with non-economic concerns. This dissonance is exacerbated by the global economy, which sees businesses operating within communities towards which they have no dependence or direct sensitivity. As a result, to ask the question, "What does this practice mean for the people in the area in which we operate?" is crucial in ensuring adherence to a community-first action plan.
The 2008 Financial Collapse
Complexities begin to arise as the the ethical implications within an economic system become more subtle. The 2008 financial collapse is a wonderful yet terrifying example of exactly what can go wrong and why corporate governance and ethics is of such importance to both a business and the society in which it operates. Leading up to the mortgage-backed security fallout of 2008, banks and investors began to prioritize profitability over ethics. Banks eliminated certain rules and regulations (though the government did as well), allowing employees to sell mortgages that were unlikely to be repaid. Following this, upper management deemed it fit to package these risky securities into bundles and sell them as safe investments (though they were in fact risky derivatives), in order to capture yet more value. Though this is only a simplified and small analysis of a complicated issue, it succinctly describes how corporate management saw each echelon of leadership ignore the core responsibility of ensuring ethical standards in lieu of capital gains. Management is at fault for this oversight; it was a failure in corporate governance.
The 2008 collapse is a powerful reminder that managers must keep in mind that their primary goal for shareholders is to maximize profits, while their primary goal to the community at large is to provide products without adverse effects on that community. Managing employees responsibly and putting their well-being first is an important step in this process, as is considering the wider implications of opening a new factory that pollutes or selling a highly unhealthy food product. Managers must be responsible because businesses as a whole cannot, and this responsibility towards integrity lies at the heart of management.