The Differences Between Corporate Governance & Ethics

by Contributing Writer; Updated September 26, 2017
Corporations have ethical duties, but those are frequently sacrificed, if necessary, in pursuit of profit.

Thematically, the main difference between corporate governance and ethics is that the ethics are the philosophical and morally decent standards that a corporation attempts to stand by, while governance processes are the means by which a corporation attempts to remain as ethical as possible while still making a profit. The governance obligations and operations of a corporation vary depending on its type. For example, a sole-proprietorship--a business owned by a single person--has different financial necessities and legal obligations than a massive, publicly-traded corporation.

Public Corporate Governance

Publicly-trade corporations have a legally-mandated fiduciary duty to their shareholders to maximize the profit of the company. Thus, ethical standards are less important than legal standards in the pursuit of making profit, which explains why corporations will often "cut corners" when trying to meet expensive legal standards. For example, a congressional investigation found that British Petroleum (BP) cut corners on the safety protocols of its investment in the Gulf of Mexico. In this rare case, BP's decision to cut corners facilitated a massive oil spill in 2010 that could theoretically drive BP into bankruptcy. In this instance, the fiduciary responsibility to maximize the short-term profits of BP's stockholders caused BP executives to compromise the company's ethical obligation to protect the environment surrounding its deep-sea oil investment.

Private Corporate Governance

Privately owned corporations do not have a legally-mandated fiduciary responsibility to maximize shareholder revenue (because there are no shareholders), allowing them greater and (potentially) substantially less flexibility when making corporate decisions. For example, a privately-corporation may be able to sacrifice a portion of its profit margin to meet regional environmental and ecological standards. At the same time, however, because the liquidity of a such a corporation is provided privately and usually by other investors, the tolerance of the corporation for sacrificing profit to meet ethical obligations could be incredibly short. Because an impatient investor can always threaten to remove their investment unless profits increase, a privately owned company may be under even greater pressure to cut corners to make a profit.

Profit vs. Ethics

The main source of conflict between corporate governance and ethical obligations is the fact that a corporation exists to make a profit, and ethics exist to benefit the social good. Entrepreneur and Nobel Prize laureate Muhammad Yunus writes that people are "80 percent self-interested and 20 percent something else." Yunus believes that "something else" to be an orientation toward the community and social good, and that the cultivation of social businesses--businesses that exist to do more social good rather than make a profit--would be a way to merge the objectives of corporate governance and social ethics.

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