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In your own words discuss how corporate governance and business ethics overlap and interact with each...

In your own words discuss how corporate governance and business ethics overlap and interact with each other in terms of the day to day requirements of a small company with three directors.

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corporate governance

Corporate governance is the system of rules, practices and processes by which a firm is directed and controlled. Corporate governance essentially involves balancing the interests of a company's many stakeholders, such as shareholders, management, customers, suppliers, financiers, government and the community.

           Many SMEs consider that corporate governance is only relevant to large companies. However, good governance presents major advantages for all companies, especially when raising capital or selling the business. The majority of companies in Australia are small-to-medium enterprises which often view corporate governance with scepticism. Good governance in this context is not primarily concerned with compliance with formal rules and regulations. Rather it is about establishing a framework of company processes and attitudes that add value to the business, help build its reputation and ensure its long-term continuity and success.

Good corporate governance is particularly important to the shareholders of unlisted companies. In most cases, such shareholders have limited ability to sell their ownership stakes and are therefore committed to staying with the company for the medium to long term. This increases their reliance on good governance

Essential principles of corporate governance for SMEs

  1. Shareholders should establish an appropriate governance framework for the company. The process and the governance requirements will develop with the growth of the company.
  2. Family companies should establish family governance mechanisms which promote coordination amongst family members and organise the relationship between the family and the business.
  3. It is important to establish an effective board which is collectively responsible for the long-term success of the company. A starting point for an SME may be the creation of an advisory board for management.
  4. There should be a clear division of responsibilities at the head of the company between the running of the board and the running of the company's business. No one individual should have unfettered powers of decision.
  5. All boards should contain directors with a sufficient mix of competencies and experience. The size and composition of the board must reflect the scale and complexity of the company's activities.
  6. The board is responsible for risk oversight and should maintain a sound system of internal control to safeguard shareholders' investment and the company's assets.
  7. Dialogue should be encouraged between the board and the shareholders on the company's strategic objectives. The board should always remember that all shareholders have to be treated equally.
  8. A stakeholder engagement process should be established, ensuring that the board always presents a balanced assessment of the company's position and prospects to its stakeholders.
  9. The board should be supplied in a timely manner with appropriate information and should meet sufficiently regularly to comply with its duties.
  10. All directors should receive induction training on joining the board and should regularly update and refresh their skills and knowledge.
  11. The board should undertake regular appraisals of its own performance and that of each individual director.
  12. Levels of remuneration should be appropriate to attract, retain and motivate executives and non-executives of the quality required to run the company successfully.

Business ethics

Business ethics are moral principles that guide the way a business behaves. The same principles that determine an individual”s actions also apply to business.

      An important component of many businesses is a stance on business ethics. This can be a challenging concept to address, as there is no clear guideline as to what makes an ethical practice. Ethics in business refers to acting in a right or morally correct way when directing business exchanges. Ethical behavior can encompass everything from offering loans for small businesses to marketing and hiring, so it's important to have a good grasp on what constitutes ethical behavior in each context

Few directors of small and medium sized enterprises (SMEs) will deny the importance of good, trusting relationships with customers, employees, suppliers and the community. The success of their company depends on it. Also, due to requirements higher up supply chains, smaller firms are increasingly asked about their social and environmental credentials during tendering processes with large corporations. SME owners and managers will also recognise the importance of trust and ethics in business when on the ‘receiving end’ of unethical business practice; for example, when suppliers deliberately do not meet agreed terms and conditions. SMEs are characterised by informal understandings and shared expectations among the workforce of how business is done. Any values and ethical principles will usually be implicit rather than formally expressed through ethics policies, codes and programmes that are familiar in large companies. The ethics of a small organisation is typically influenced by the owner ,manager or managing director. Through their very visible presence, their personal attitudes and behaviours will set the tone of the business and have the potential to signal to employees how seriously ethical behaviour is to be taken in the organisation. SMEs are not typically able to devote as many resources to building an ethical workplace culture as larger organisations. However, there are advantages to having a somewhat more formal ethics policy in place. Firstly, it reinforces and makes explicit the values and principles that are part of the organisational culture, so allowing them to be communicated to stakeholders. Secondly, a policy will provide guidance and support to employees on how they are expected to conduct their business.

            Small and medium enterprises (SMEs) are engine of growth in prosperous and growing economy and play an important role in creating economic growth. SMEs contribute to economic development by creating employment for rural and urban population, providing flexibility and innovation through entrepreneurship and increase international trade by diversifying economic activity. Their role in income generation and economic growth for developing countries is critical. In the developed countries SMEs are major contributors to GDP and private sector employment contributing as much as 60% to workforce. In developing countries, they employ more than 70% of labor force. The abundance of labor and the shortages of capital which are characteristics of developing countries are comparable with the SMEs labor intensive character.


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