Corporate governance

Corporate governance refers to the system by which corporations are directed and controlled. The governance structure specifies the distribution of rights and responsibilities among different participants in the corporation (such as the board of directors, managers, shareholders, creditors, auditors, regulators, and other stakeholders) and specifies the rules and procedures for making decisions in corporate affairs. Governance provides the structure through which corporations set and pursue their objectives, while reflecting the context of the social, regulatory and market environment. Governance is a mechanism for monitoring the actions, policies and decisions of corporations. Governance involves the alignment of interests among the stakeholders.[1][2][3] There has been renewed interest in the corporate governance practices of modern corporations, particularly in relation to accountability, since the high-profile collapses of a number of large corporations during 20012002, most of which involved accounting fraud. Corporate scandals of various forms have maintained public and political interest in the regulation of corporate governance. In the U.S., these include Enron Corporation and MCI Inc. (formerly WorldCom). Their demise is associated with the U.S. federal government passing the Sarbanes-Oxley Act in 2002, intending to restore public confidence in corporate governance. Comparable failures in Australia (HIH, One.Tel) are associated with the eventual passage of the CLERP 9 reforms. Similar corporate failures in other countries stimulated increased regulatory interest (e.g., Parmalat in Italy).

Contents

1 Other definitions 2 Principles of corporate governance 3 Corporate governance models around the world o 3.1 Continental Europe o 3.2 India o 3.3 United States, United Kingdom 4 Regulation o 4.1 Legal environment General o 4.2 Sarbanes-Oxley Act of 2002 5 Codes and guidelines o 5.1 OECD principles o 5.2 Stock exchange listing standards o 5.3 Other guidelines 6 History o 6.1 East Asia 7 Parties to corporate governance o 7.1 Responsibilities of the board of directors o 7.2 Stakeholder interests o 7.3 Control and ownership structures 7.3.1 Family control 7.3.2 Diffuse shareholders

8 Mechanisms and controls o 8.1 Internal corporate governance controls o 8.2 External corporate governance controls o 8.3 Financial reporting and the independent auditor 9 Systemic problems of corporate governance 10 Debates in corporate governance o 10.1 Executive pay o 10.2 Separation of Chief Executive Officer and Chairman of the Board roles 11 See also 12 References 13 Further reading 14 External links

Other definitions
Corporate governance has also been defined as "a system of law and sound approaches by which corporations are directed and controlled focusing on the internal and external corporate structures with the intention of monitoring the actions of management and directors and thereby mitigating agency risks which may stem from the misdeeds of corporate officers."[4] In contemporary business corporations, the main external stakeholder groups are shareholders, debtholders, trade creditors, suppliers, customers and communities affected by the corporation's activities. Internal stakeholders are the board of directors, executives, and other employees. Much of the contemporary interest in corporate governance is concerned with mitigation of the conflicts of interests between stakeholders.[5] Ways of mitigating or preventing these conflicts of interests include the processes, customs, policies, laws, and institutions which have an impact on the way a company is controlled.[6][7] An important theme of governance is the nature and extent of corporate accountability. A related but separate thread of discussions focuses on the impact of a corporate governance system on economic efficiency, with a strong emphasis on shareholders' welfare.[8][9] In large firms where there is a separation of ownership and management and no controlling shareholder, the principalagent issue arises between upper-management (the "agent") which may have very different interests, and by definition considerably more information, than shareholders (the "principals"). The danger arises that rather than overseeing management on behalf of shareholders, the board of directors may become insulated from shareholders and beholden to management.[10] This aspect is particularly present in contemporary public debates and developments in regulatory policy.(see regulation and policy regulation).[1] Economic analysis has resulted in a literature on the subject.[11] One source defines corporate governance as "the set of conditions that shapes the ex post bargaining over the quasi-rents generated by a firm."[12] The firm itself is modelled as a governance structure acting through the mechanisms of contract.[13][9] Here corporate governance may include its relation to corporate finance.[14]

Principles of corporate governance

Contemporary discussions of corporate governance tend to refer to principles raised in three documents released since 1990: The Cadbury Report (UK, 1992), the Principles of Corporate Governance (OECD, 1998 and 2004), the Sarbanes-Oxley Act of 2002 (US, 2002). The Cadbury and OECD reports present general principles around which businesses are expected to operate to assure proper governance. The Sarbanes-Oxley Act, informally referred to as Sarbox or Sox, is an attempt by the federal government in the United States to legislate several of the principles recommended in the Cadbury and OECD reports.

Rights and equitable treatment of shareholders:[15][16][17] Organizations should respect the rights of shareholders and help shareholders to exercise those rights. They can help shareholders exercise their rights by openly and effectively communicating information and by encouraging shareholders to participate in general meetings. Interests of other stakeholders:[18] Organizations should recognize that they have legal, contractual, social, and market driven obligations to non-shareholder stakeholders, including employees, investors, creditors, suppliers, local communities, customers, and policy makers. Role and responsibilities of the board:[19][20] The board needs sufficient relevant skills and understanding to review and challenge management performance. It also needs adequate size and appropriate levels of independence and commitment. Integrity and ethical behavior:[21][22] Integrity should be a fundamental requirement in choosing corporate officers and board members. Organizations should develop a code of conduct for their directors and executives that promotes ethical and responsible decision making. Disclosure and transparency:[23][24] Organizations should clarify and make publicly known the roles and responsibilities of board and management to provide stakeholders with a level of accountability. They should also implement procedures to independently verify and safeguard the integrity of the company's financial reporting. Disclosure of material matters concerning the organization should be timely and balanced to ensure that all investors have access to clear, factual information.

Corporate governance models around the world

There are many different models of corporate governance around the world. These differ according to the variety of capitalism in which they are embedded. The Anglo-American "model" tends to emphasize the interests of shareholders. The coordinated or Multistakeholder Model associated with Continental Europe and Japan also recognizes the interests of workers, managers, suppliers, customers, and the community. A related distinction is between marketorientated and network-orientated models of corporate governance.[25]

Continental Europe
Some continental European countries, including Germany and the Netherlands, require a twotiered Board of Directors as a means of improving corporate governance.[26] In the two-tiered

board, the Executive Board, made up of company executives, generally runs day-to-day operations while the supervisory board, made up entirely of non-executive directors who represent shareholders and employees, hires and fires the members of the executive board, determines their compensation, and reviews major business decisions.[27] See also Aktiengesellschaft.

India
India's SEBI Committee on Corporate Governance defines corporate governance as the "acceptance by management of the inalienable rights of shareholders as the true owners of the corporation and of their own role as trustees on behalf of the shareholders. It is about commitment to values, about ethical business conduct and about making a distinction between personal & corporate funds in the management of a company."[28] It has been suggested that the Indian approach is drawn from the Gandhian principle of trusteeship and the Directive Principles of the Indian Constitution, but this conceptualization of corporate objectives is also prevalent in Anglo-American and most other jurisdictions.

United States, United Kingdom

The so-called "Anglo-American model" of corporate governance emphasizes the interests of shareholders. It relies on a single-tiered Board of Directors that is normally dominated by nonexecutive directors elected by shareholders. Because of this, it is also known as "the unitary system".[29][30] Within this system, many boards include some executives from the company (who are ex officio members of the board). Non-executive directors are expected to outnumber executive directors and hold key posts, including audit and compensation committees. The United States and the United Kingdom differ in one critical respect with regard to corporate governance: In the United Kingdom, the CEO generally does not also serve as Chairman of the Board, whereas in the US having the dual role is the norm, despite major misgivings regarding the impact on corporate governance.[31] In the United States, corporations are directly governed by state laws, while the exchange (offering and trading) of securities in corporations (including shares) is governed by federal legislation. Many US states have adopted the Model Business Corporation Act, but the dominant state law for publicly traded corporations is Delaware, which continues to be the place of incorporation for the majority of publicly traded corporations.[32] Individual rules for corporations are based upon the corporate charter and, less authoritatively, the corporate bylaws.[32] Shareholders cannot initiate changes in the corporate charter although they can initiate changes to the corporate bylaws.[32]

Regulation
Companies law

Company

Business

Business entities

Sole proprietorship

Partnership Corporation Cooperative

European Union / EEA

EEIG SCE SE SPE

UK / Ireland / Commonwealth

Community interest company

Limited company
o o o o

by guarantee by shares Proprietary Public

Unlimited company

United States

Benefit corporation C corporation

LLC LLLP

Series LLC S corporation

Delaware corporation Delaware statutory trust

Massachusetts business trust

Nevada corporation

Additional entities

AB AG ANS A/S AS GmbH K.K. N.V. Oy S.A. more

Doctrines

Business judgment rule Corporate governance Internal affairs doctrine

De facto corporation and corporation by estoppel Limited liability Rochdale Principles

Piercing the corporate veil Ultra vires

Corporate laws

United States Canada Germany France South Africa Australia Vietnam United Kingdom

Related areas

Civil procedure

Contract

v t e

Legal environment General

Corporations are created as legal persons by the laws and regulations of a particular jurisdiction. These may vary in many respects between countries, but a corporation's legal person status is fundamental to all jurisdictions and is conferred by statute. This allows the entity to hold property in its own right without reference to any particular real person. It also results in the perpetual existence that characterizes the modern corporation. The statutory granting of corporate existence may arise from general purpose legislation (which is the general case) or from a statute to create a specific corporation, which was the only method prior to the 19th century.[citation needed] In addition to the statutory laws of the relevant jurisdiction, corporations are subject to common law in some countries, and various laws and regulations affecting business practices. In most jurisdictions, corporations also have a constitution that provides individual rules that govern the corporation and authorize or constrain its decision-makers. This constitution is identified by a variety of terms; in English-speaking jurisdictions, it is usually known as the Corporate Charter or the [Memorandum] and Articles of Association. The capacity of shareholders to modify the constitution of their corporation can vary substantially.[citation needed] The U.S. passed the Foreign Corrupt Practices Act (FCPA) in 1977, with subsequent modifications. This law made it illegal to bribe government officials and required corporations to maintain adequate accounting controls. It is enforced by the U.S. Department of Justice and the Securities and Exchange Commission (SEC). Substantial civil and criminal penalties have been levied on corporations and executives convicted of bribery.[33] The UK passed the Bribery Act in 2010. This law made it illegal to bribe either government or private citizens or make facilitating payments (i.e., payment to a government official to perform their routine duties more quickly). It also required corporations to establish controls to prevent bribery.

Sarbanes-Oxley Act of 2002

Main article: Sarbanes-Oxley Act

The Sarbanes-Oxley Act of 2002 was enacted in the wake of a series of high profile corporate scandals. It established a series of requirements that affect corporate governance in the U.S. and influenced similar laws in many other countries. The law required, along with many other elements, that:

The Public Company Accounting Oversight Board (PCAOB) be established to regulate the auditing profession, which had been self-regulated prior to the law. Auditors are responsible for reviewing the financial statements of corporations and issuing an opinion as to their reliability. The Chief Executive Officer (CEO) and Chief Financial Officer (CFO) attest to the financial statements. Prior to the law, CEO's had claimed in court they hadn't reviewed the information as part of their defense. Board audit committees have members that are independent and disclose whether or not at least one is a financial expert, or reasons why no such expert is on the audit committee. External audit firms cannot provide certain types of consulting services and must rotate their lead partner every 5 years. Further, an audit firm cannot audit a company if those in specified senior management roles worked for the auditor in the past year. Prior to the law, there was the real or perceived conflict of interest between providing an independent opinion on the accuracy and reliability of financial statements when the same firm was also providing lucrative consulting services.[34]

Codes and guidelines

Corporate governance principles and codes have been developed in different countries and issued from stock exchanges, corporations, institutional investors, or associations (institutes) of directors and managers with the support of governments and international organizations. As a rule, compliance with these governance recommendations is not mandated by law, although the codes linked to stock exchange listing requirements may have a coercive effect.

OECD principles
One of the most influential guidelines has been the OECD Principles of Corporate Governance published in 1999 and revised in 2004.[1] The OECD guidelines are often referenced by countries developing local codes or guidelines. Building on the work of the OECD, other international organizations, private sector associations and more than 20 national corporate governance codes formed the United Nations Intergovernmental Working Group of Experts on International Standards of Accounting and Reporting (ISAR) to produce their Guidance on Good Practices in Corporate Governance Disclosure.[35] This internationally agreed[36] benchmark consists of more than fifty distinct disclosure items across five broad categories:[37]

Auditing Board and management structure and process Corporate responsibility and compliance in organisation Financial transparency and information disclosure Ownership structure and exercise of control rights

Stock exchange listing standards

Companies listed on the New York Stock Exchange (NYSE) and other stock exchanges are required to meet certain governance standards. For example, the NYSE Listed Company Manual requires, among many other elements:

Independent directors: "Listed companies must have a majority of independent directors...Effective boards of directors exercise independent judgment in carrying out their responsibilities. Requiring a majority of independent directors will increase the quality of board oversight and lessen the possibility of damaging conflicts of interest." (Section 303A.01) An independent director is not part of management and has no "material financial relationship" with the company. Board meetings that exclude management: "To empower non-management directors to serve as a more effective check on management, the non-management directors of each listed company must meet at regularly scheduled executive sessions without management." (Section 303A.03) Boards organize their members into committees with specific responsibilities per defined charters. "Listed companies must have a nominating/corporate governance committee composed entirely of independent directors." This committee is responsible for nominating new members for the board of directors. Compensation and Audit Committees are also specified, with the latter subject to a variety of listing standards as well as outside regulations. (Section 303A.04 and others)[38]

Other guidelines
The investor-led organisation International Corporate Governance Network (ICGN) was set up by individuals centered around the ten largest pension funds in the world 1995. The aim is to promote global corporate governance standards. The network is led by investors that manage 18 trillion dollars and members are located in fifty different countries. ICGN has developed a suite of global guidelines ranging from shareholder rights to business ethics.[citation needed] The World Business Council for Sustainable Development (WBCSD) has done work on corporate governance, particularly on accountability and reporting, and in 2004 released Issue Management Tool: Strategic challenges for business in the use of corporate responsibility codes, standards, and frameworks. This document offers general information and a perspective from a business association/think-tank on a few key codes, standards and frameworks relevant to the sustainability agenda. In 2009, the International Finance Corporation and the UN Global Compact released a report, Corporate Governance - the Foundation for Corporate Citizenship and Sustainable Business, linking the environmental, social and governance responsibilities of a company to its financial performance and long-term sustainability. Most codes are largely voluntary. An issue raised in the U.S. since the 2005 Disney decision[39] is the degree to which companies manage their governance responsibilities; in other words, do they merely try to supersede the legal threshold, or should they create governance guidelines that

ascend to the level of best practice. For example, the guidelines issued by associations of directors, corporate managers and individual companies tend to be wholly voluntary but such documents may have a wider effect by prompting other companies to adopt similar practices.[citation needed]

History
In the 20th century in the immediate aftermath of the Wall Street Crash of 1929 legal scholars such as Adolf Augustus Berle, Edwin Dodd, and Gardiner C. Means pondered on the changing role of the modern corporation in society.[40] From the Chicago school of economics, Ronald Coase[41] introduced the notion of transaction costs into the understanding of why firms are founded and how they continue to behave.[42] US expansion after World War II through the emergence of multinational corporations saw the establishment of the managerial class. Studying and writing about the new class were several Harvard Business School management professors: Myles Mace (entrepreneurship), Alfred D. Chandler, Jr. (business history), Jay Lorsch (organizational behavior) and Elizabeth MacIver (organizational behavior). According to Lorsch and MacIver "many large corporations have dominant control over business affairs without sufficient accountability or monitoring by their board of directors."[citation needed] In the 1980s, Eugene Fama and Michael Jensen[43] established the principalagent problem as a way of understanding corporate governance: the firm is seen as a series of contracts.[44] Over the past three decades, corporate directors duties in the U.S. have expanded beyond their traditional legal responsibility of duty of loyalty to the corporation and its shareholders.[45][vague] In the first half of the 1990s, the issue of corporate governance in the U.S. received considerable press attention due to the wave of CEO dismissals (e.g.: IBM, Kodak, Honeywell) by their boards. The California Public Employees' Retirement System (CalPERS) led a wave of institutional shareholder activism (something only very rarely seen before), as a way of ensuring that corporate value would not be destroyed by the now traditionally cozy relationships between the CEO and the board of directors (e.g., by the unrestrained issuance of stock options, not infrequently back dated). In the early 2000s, the massive bankruptcies (and criminal malfeasance) of Enron and Worldcom, as well as lesser corporate scandals, such as Adelphia Communications, AOL, Arthur Andersen, Global Crossing, Tyco, led to increased political interest in corporate governance. This is reflected in the passage of the Sarbanes-Oxley Act of 2002. Other triggers for continued interest in the corporate governance of organizations included the financial crisis of 2008/9 and the level of CEO pay [46]

East Asia
In 1997, the East Asian Financial Crisis severely affected the economies of Thailand, Indonesia, South Korea, Malaysia, and the Philippines through the exit of foreign capital after property

assets collapsed. The lack of corporate governance mechanisms in these countries highlighted the weaknesses of the institutions in their economies.[citation needed]

Parties to corporate governance

Key parties involved in corporate governance include stakeholders such as the board of directors, management and shareholders. External stakeholders such as creditors, auditors, customers, suppliers, government agencies, and the community at large also exert influence. The agency view of the corporation posits that the shareholder forgoes decision rights (control) and entrusts the manager to act in the shareholders' best (joint) interests. Partly as a result of this separation between the two investors and managers, corporate governance mechanisms include a system of controls intended to help align managers' incentives with those of shareholders. Agency concerns (risk) are necessarily lower for a controlling shareholder.[citation needed]

Responsibilities of the board of directors

Former Chairman of the Board of General Motors John G. Smale wrote in 1995: "The board is responsible for the successful perpetuation of the corporation. That responsibility cannot be relegated to management."[47] A board of directors is expected to play a key role in corporate governance. The board has responsibility for: CEO selection and succession; providing feedback to management on the organization's strategy; compensating senior executives; monitoring financial health, performance and risk; and ensuring accountability of the organization to its investors and authorities. Boards typically have several committees (e.g., Compensation, Nominating and Audit) to perform their work.[48] The OECD Principles of Corporate Governance (2004) describe the responsibilities of the board; some of these are summarized below:[1]

Board members should be informed and act ethically and in good faith, with due diligence and care, in the best interest of the company and the shareholders. Review and guide corporate strategy, objective setting, major plans of action, risk policy, capital plans, and annual budgets. Oversee major acquisitions and divestitures. Select, compensate, monitor and replace key executives and oversee succession planning. Align key executive and board remuneration (pay) with the longer-term interests of the company and its shareholders. Ensure a formal and transparent board member nomination and election process. Ensure the integrity of the corporations accounting and financial reporting systems, including their independent audit. Ensure appropriate systems of internal control are established. Oversee the process of disclosure and communications. Where committees of the board are established, their mandate, composition and working procedures should be well-defined and disclosed.

Stakeholder interests

All parties to corporate governance have an interest, whether direct or indirect, in the financial performance of the corporation. Directors, workers and management receive salaries, benefits and reputation, while investors expect to receive financial returns. For lenders, it is specified interest payments, while returns to equity investors arise from dividend distributions or capital gains on their stock. Customers are concerned with the certainty of the provision of goods and services of an appropriate quality; suppliers are concerned with compensation for their goods or services, and possible continued trading relationships. These parties provide value to the corporation in the form of financial, physical, human and other forms of capital. Many parties may also be concerned with corporate social performance.[citation needed] A key factor in a party's decision to participate in or engage with a corporation is their confidence that the corporation will deliver the party's expected outcomes. When categories of parties (stakeholders) do not have sufficient confidence that a corporation is being controlled and directed in a manner consistent with their desired outcomes, they are less likely to engage with the corporation. When this becomes an endemic system feature, the loss of confidence and participation in markets may affect many other stakeholders, and increases the likelihood of political action. There is substantial interest in how external systems and institutions, including markets, influence corporate governance.[citation needed]

Control and ownership structures

Control and ownership structure refers to the types and composition of shareholders in a corporation. In some countries such as most of Continental Europe, ownership is not necessarily equivalent to control due to the existence of e.g. dual-class shares, ownership pyramids, voting coalitions, proxy votes and clauses in the articles of association that confer additional voting rights to long-term shareholders.[49] Ownership is typically defined as the ownership of cash flow rights whereas control refers to ownership of control or voting rights.[49] Researchers often "measure" control and ownership structures by using some observable measures of control and ownership concentration or the extent of inside control and ownership. Some features or types of control and ownership structure involving corporate groups include pyramids, crossshareholdings, rings, and webs. German "concerns" (Konzern) are legally recognized corporate groups with complex structures. Japanese keiretsu () and South Korean chaebol (which tend to be family-controlled) are corporate groups which consist of complex interlocking business relationships and shareholdings. Cross-shareholding are an essential feature of keiretsu and chaebol groups [4]. Corporate engagement with shareholders and other stakeholders can differ substantially across different control and ownership structures. Family control Family interests dominate ownership and control structures of some corporations, and it has been suggested the oversight of family controlled corporation is superior to that of corporations "controlled" by institutional investors (or with such diverse share ownership that they are controlled by management). A recent study by Credit Suisse found that companies in which "founding families retain a stake of more than 10% of the company's capital enjoyed a superior performance over their respective sectorial peers." Since 1996, this superior performance amounts to 8% per year.[50] Forget the celebrity CEO. "Look beyond Six Sigma and the latest

technology fad. One of the biggest strategic advantages a company can have is blood ties," according to a Business Week study[51][52] Diffuse shareholders The significance of institutional investors varies substantially across countries. In developed Anglo-American countries (Australia, Canada, New Zealand, U.K., U.S.), institutional investors dominate the market for stocks in larger corporations. While the majority of the shares in the Japanese market are held by financial companies and industrial corporations, these are not institutional investors if their holdings are largely with-on group.[citation needed] The largest pools of invested money (such as the mutual fund 'Vanguard 500', or the largest investment management firm for corporations, State Street Corp.) are designed to maximize the benefits of diversified investment by investing in a very large number of different corporations with sufficient liquidity. The idea is this strategy will largely eliminate individual firm financial or other risk and. A consequence of this approach is that these investors have relatively little interest in the governance of a particular corporation. It is often assumed that, if institutional investors pressing for will likely be costly because of "golden handshakes" or the effort required, they will simply sell out their interest.[citation needed]

Mechanisms and controls

Corporate governance mechanisms and controls are designed to reduce the inefficiencies that arise from moral hazard and adverse selection. There are both internal monitoring systems and external monitoring systems.[53] Internal monitoring can be done, for example, by one (or a few) large shareholder(s) in the case of privately held companies or a firm belonging to a business group. Furthermore, the various board mechanisms provide for internal monitoring. External monitoring of managers' behavior, occurs when an independent third party (e.g. the external auditor) attests the accuracy of information provided by management to investors. Stock analysts and debt holders may also conduct such external monitoring. An ideal monitoring and control system should regulate both motivation and ability, while providing incentive alignment toward corporate goals and objectives. Care should be taken that incentives are not so strong that some individuals are tempted to cross lines of ethical behavior, for example by manipulating revenue and profit figures to drive the share price of the company up.[42]

Internal corporate governance controls

Internal corporate governance controls monitor activities and then take corrective action to accomplish organisational goals. Examples include:

Monitoring by the board of directors: The board of directors, with its legal authority to hire, fire and compensate top management, safeguards invested capital. Regular board meetings allow potential problems to be identified, discussed and avoided. Whilst nonexecutive directors are thought to be more independent, they may not always result in more effective corporate governance and may not increase performance.[54] Different board structures are optimal for different firms. Moreover, the ability of the board to

monitor the firm's executives is a function of its access to information. Executive directors possess superior knowledge of the decision-making process and therefore evaluate top management on the basis of the quality of its decisions that lead to financial performance outcomes, ex ante. It could be argued, therefore, that executive directors look beyond the financial criteria.[citation needed] Internal control procedures and internal auditors: Internal control procedures are policies implemented by an entity's board of directors, audit committee, management, and other personnel to provide reasonable assurance of the entity achieving its objectives related to reliable financial reporting, operating efficiency, and compliance with laws and regulations. Internal auditors are personnel within an organization who test the design and implementation of the entity's internal control procedures and the reliability of its financial reporting[citation needed] Balance of power: The simplest balance of power is very common; require that the President be a different person from the Treasurer. This application of separation of power is further developed in companies where separate divisions check and balance each other's actions. One group may propose company-wide administrative changes, another group review and can veto the changes, and a third group check that the interests of people (customers, shareholders, employees) outside the three groups are being met.[citation needed] Remuneration: Performance-based remuneration is designed to relate some proportion of salary to individual performance. It may be in the form of cash or non-cash payments such as shares and share options, superannuation or other benefits. Such incentive schemes, however, are reactive in the sense that they provide no mechanism for preventing mistakes or opportunistic behavior, and can elicit myopic behavior.[citation needed] Monitoring by large shareholders and/or monitoring by banks and other large creditors: Given their large investment in the firm, these stakeholders have the incentives, combined with the right degree of control and power, to monitor the management.[55]

In publicly traded U.S. corporations, boards of directors are largely chosen by the President/CEO and the President/CEO often takes the Chair of the Board position for his/herself (which makes it much more difficult for the institutional owners to "fire" him/her). The practice of the CEO also being the Chair of the Board is fairly common in large American corporations.[56] While this practice is common in the U.S., it is relatively rare elsewhere. In the U.K., successive codes of best practice have recommended against duality.[citation needed]

External corporate governance controls

External corporate governance controls encompass the controls external stakeholders exercise over the organization. Examples include:

competition debt covenants demand for and assessment of performance information (especially financial statements) government regulations

managerial labour market media pressure takeovers

Financial reporting and the independent auditor

The board of directors has primary responsibility for the corporation's external financial reporting functions. The Chief Executive Officer and Chief Financial Officer are crucial participants and boards usually have a high degree of reliance on them for the integrity and supply of accounting information. They oversee the internal accounting systems, and are dependent on the corporation's accountants and internal auditors. Current accounting rules under International Accounting Standards and U.S. GAAP allow managers some choice in determining the methods of measurement and criteria for recognition of various financial reporting elements. The potential exercise of this choice to improve apparent performance (see creative accounting and earnings management) increases the information risk for users. Financial reporting fraud, including non-disclosure and deliberate falsification of values also contributes to users' information risk. To reduce this risk and to enhance the perceived integrity of financial reports, corporation financial reports must be audited by an independent external auditor who issues a report that accompanies the financial statements (see financial audit). One area of concern is whether the auditing firm acts as both the independent auditor and management consultant to the firm they are auditing. This may result in a conflict of interest which places the integrity of financial reports in doubt due to client pressure to appease management. The power of the corporate client to initiate and terminate management consulting services and, more fundamentally, to select and dismiss accounting firms contradicts the concept of an independent auditor. Changes enacted in the United States in the form of the SarbanesOxley Act (following numerous corporate scandals, culminating with the Enron scandal) prohibit accounting firms from providing both auditing and management consulting services. Similar provisions are in place under clause 49 of Standard Listing Agreement in India.

Systemic problems of corporate governance

Demand for information: In order to influence the directors, the shareholders must combine with others to form a voting group which can pose a real threat of carrying resolutions or appointing directors at a general meeting.[57] Monitoring costs: A barrier to shareholders using good information is the cost of processing it, especially to a small shareholder. The traditional answer to this problem is the efficient market hypothesis (in finance, the efficient market hypothesis (EMH) asserts that financial markets are efficient), which suggests that the small shareholder will free ride on the judgments of larger professional investors.[57] Supply of accounting information: Financial accounts form a crucial link in enabling providers of finance to monitor directors. Imperfections in the financial reporting process will cause imperfections in the effectiveness of corporate governance. This should, ideally, be corrected by the working of the external auditing process.[57]

Debates in corporate governance

Executive pay
Main article: Say on pay Increasing attention and regulation (as under the Swiss referendum "against corporate Rip-offs" of 2013) has been brought to executive pay levels since the financial crisis of 20072008. Research on the relationship between firm performance and executive compensation does not identify consistent and significant relationships between executives' remuneration and firm performance. Not all firms experience the same levels of agency conflict, and external and internal monitoring devices may be more effective for some than for others.[46][58] Some researchers have found that the largest CEO performance incentives came from ownership of the firm's shares, while other researchers found that the relationship between share ownership and firm performance was dependent on the level of ownership. The results suggest that increases in ownership above 20% cause management to become more entrenched, and less interested in the welfare of their shareholders.[58] Some argue that firm performance is positively associated with share option plans and that these plans direct managers' energies and extend their decision horizons toward the long-term, rather than the short-term, performance of the company. However, that point of view came under substantial criticism circa in the wake of various security scandals including mutual fund timing episodes and, in particular, the backdating of option grants as documented by University of Iowa academic Erik Lie[59] and reported by James Blander and Charles Forelle of the Wall Street Journal.[58][60] Even before the negative influence on public opinion caused by the 2006 backdating scandal, use of options faced various criticisms. A particularly forceful and long running argument concerned the interaction of executive options with corporate stock repurchase programs. Numerous authorities (including U.S. Federal Reserve Board economist Weisbenner) determined options may be employed in concert with stock buybacks in a manner contrary to shareholder interests. These authors argued that, in part, corporate stock buybacks for U.S. Standard & Poors 500 companies surged to a $500 billion annual rate in late 2006 because of the impact of options. A compendium of academic works on the option/buyback issue is included in the study Scandal by author M. Gumport issued in 2006. A combination of accounting changes and governance issues led options to become a less popular means of remuneration as 2006 progressed, and various alternative implementations of buybacks surfaced to challenge the dominance of "open market" cash buybacks as the preferred means of implementing a share repurchase plan.

Separation of Chief Executive Officer and Chairman of the Board roles

Shareholders elect a board of directors, who in turn hire a Chief Executive Officer (CEO) to lead management. The primary responsibility of the board relates to the selection and retention of the

CEO. However, in many U.S. corporations the CEO and Chairman of the Board roles are held by the same person. This creates an inherent conflict of interest between management and the board. Critics of combined roles argue the two roles should be separated to avoid the conflict of interest. Advocates argue that empirical studies do not indicate that separation of the roles improves stock market performance and that it should be up to shareholders to determine what corporate governance model is appropriate for the firm.[61] In 2004, 73.4% of U.S. companies had combined roles; this fell to 57.2% by May 2012. Many U.S. companies with combined roles have appointed a "Lead Director" to improve independence of the board from management. German and UK companies have generally split the roles in nearly 100% of listed companies. Empirical evidence does not indicate one model is superior to the other in terms of performance. However, one study indicated that poorly performing firms tend to remove separate CEO's more frequently than when the CEO/Chair roles are combined.[62]

See also

List of countries by corporate governance Agency cost Agency Theory Basel II Business ethics Corporate crime Corporate Law Economic Reform Program Act 2004 Corporate social entrepreneur Corporate transparency Corporation Golden parachute Governance Interest of the company Internal Control International Organization of Supreme Audit Institutions King Report on Corporate Governance Legal origins theory Private benefits of control Risk management Say on pay Stakeholder theory

References
1. ^ Jump up to: a b c d "OECD Principles of Corporate Governance, 2004". OECD. Retrieved 2013-05-18. 2. Jump up ^ Tricker, Adrian, Essentials for Board Directors: An AZ Guide, Bloomberg Press, New York, 2009, ISBN 978-1-57660-354-3

3. Jump up ^ Rezaee, Zabihollah (2002). Financial Statement Fraud. John Wiley & Sons. ISBN 0-471-09216-9. 4. Jump up ^ Sifuna, Anazett Pacy (2012). "Disclose or Abstain: The Prohibition of Insider Trading on Trial". Journal of International Banking Law and Regulation 27 (9). 5. Jump up ^ Goergen, Marc, International Corporate Governance, (Prentice Hall 2012) ISBN 978-0-273-75125-0 6. Jump up ^ "The Financial Times Lexicon". The Financial Times. Retrieved 2011-07-20. 7. Jump up ^ Cadbury, Adrian, Report of the Committee on the Financial Aspects of Corporate Governance, Gee, London, December, 1992, p. 15 8. Jump up ^ Bowen, William G., Inside the Boardroom: Governance by Directors and Trustees, John Wiley & Sons, 1994, ISBN 0-471-02501-1 9. ^ Jump up to: a b Daines, Robert, and Michael Klausner, 2008 "corporate law, economic analysis of," The New Palgrave Dictionary of Economics, 2nd Edition. Abstract. 10. Jump up ^ Pay Without Performance the Unfulfilled Promise of Executive Compensation by Lucian Bebchuk and Jesse Fried, Harvard University Press 2004, 15 17 11. Jump up ^ Shleifer, Andrei, and Robert W. Vishny (1997). "A Survey of Corporate Governance," Journal of Finance, 52(2), pp, 737783. Oliver Hart (1989). "An Economist's Perspective on the Theory of the Firm," Columbia Law Review, 89(7), pp. 17571774. 12. Jump up ^ Luigi Zingales, 2008. "corporate governance," The New Palgrave Dictionary of Economics, 2nd Edition. Abstract. 13. Jump up ^ Williamson, Oliver E. (2002). "The Theory of the Firm as Governance Structure: From Choice to Contract," Journal of Economic Perspectives, 16(3), pp. 178 87, 19192. [Pp. 17195.] Abstract. _____ (1996). The Mechanisms of Governance. Oxford University Press. Preview. Pagano, Marco, and Paolo F. Volpin (2005). "The Political Economy of Corporate Governance," American Economic Review, 95(4), pp. 10051030. 14. Jump up ^ In the widely-used (Journal of Economic Literature) JEL classification codes under JEL: G, Financial economics, Corporate Finance and Governance are paired at JEL: G3. Williamson, Oliver E. (1988). "Corporate Finance and Corporate Governance," Journal of Finance, 43(3), pp. 567591. Schmidt, Reinhard, and H. Marcel Tyrell (1997). Financial Systems, Corporate Finance and Corporate Governance," European Financial Management, 3(3), pp. 333 361. Abstract. Tirole, Jean (1999).The Theory of Corporate Finance", Princeton. Description and scrollable preview. 15. Jump up ^ "OECD Principles of Corporate Governance, 2004, Articles II and III". OECD. Retrieved 2011-07-24. 16. Jump up ^ Cadbury, Adrian, Report of the Committee on the Financial Aspects of Corporate Governance, Gee, London, December, 1992, Sections 3.4 17. Jump up ^ Sarbanes-Oxley Act of 2002, US Congress, Title VIII 18. Jump up ^ "OECD Principles of Corporate Governance, 2004, Preamble and Article IV". OECD. Retrieved 2011-07-24.

19. Jump up ^ "OECD Principles of Corporate Governance, 2004, Article VI". OECD. Retrieved 2011-07-24. 20. Jump up ^ Cadbury, Adrian, Report of the Committee on the Financial Aspects of Corporate Governance, Gee, London, December, 1992, Section 3.4 21. Jump up ^ Cadbury, Adrian, Report of the Committee on the Financial Aspects of Corporate Governance, Gee, London, December, 1992, Sections 3.2, 3.3, 4.33, 4.51 and 7.4 22. Jump up ^ Sarbanes-Oxley Act of 2002, US Congress, Title I, 101(c)(1), Title VIII, and Title IX, 406 23. Jump up ^ "OECD Principals of Corporate Governance, 2004, Articles I and V". OECD. Retrieved 2011-07-24. 24. Jump up ^ Cadbury, Adrian, Report of the Committee on the Financial Aspects of Corporate Governance, Gee, London, December, 1992, Section 3.2 25. Jump up ^ Sytse Douma & Hein Schreuder (2013) Economic Approaches to Organizations, 5th edition, chapter 15, London: Pearson 26. Jump up ^ Tricker, Bob, Essentials for Board Directors: An AZ Guide, Second Edition, Bloomberg Press, New York, 2009, ISBN 978-1-57660-354-3 27. Jump up ^ Hopt, Klaus J., "The German Two-Tier Board (Aufsichtsrat), A German View on Corporate Governance" in Hopt, Klaus J. and Wymeersch, Eddy (eds), Comparative Corporate Governance: Essays and Materials, de Gruyter, Berlin & New York, ISBN 3-11-015765-9 28. Jump up ^ "Report of the SEBI Committee on Corporate Governance, February 2003". SEBI Committee on Corporate Governance. Retrieved 2011-07-20. 29. Jump up ^ Cadbury, Adrian, Report of the Committee on the Financial Aspects of Corporate Governance, Gee, London, December, 1992 30. Jump up ^ Mallin, Christine A., "Corporate Governance Developments in the UK" in Mallin, Christine A (ed), Handbook on International Corporate Governance: Country Analyses, Second Edition, Edward Elgar Publishing, 2011, ISBN 978-1-84980-123-2 31. Jump up ^ Bowen, William G, The Board Book: An Insider's Guide for Directors and Trustees, W.W. Norton & Company, New York & London, 2008, ISBN 978-0-39306645-6 32. ^ Jump up to: a b c Bebchuck LA. (2004).The Case for Increasing Shareholder Power.Harvard Law Review. 33. Jump up ^ DOJ Website Foreign Corrupt Practices Act Guidance May 2013 34. Jump up ^ Text of the Sarbanes-Oxley Act of 2002 35. Jump up ^ Guidance on Good Practices in Corporate Governance Disclosure. 36. Jump up ^ TD/B/COM.2/ISAR/31 37. Jump up ^ "International Standards of Accounting and Reporting, Corporate Governance Disclosure". United Nations Conference on Trade and Development. Retrieved 2008-11-09. 38. Jump up ^ "New York Stock Exchange Listing Manual". NYSE Listing Manual. Retrieved 2013-05-18. 39. Jump up ^ The Disney Decision of 2005 and the precedent it sets for corporate governance and fiduciary responsibility, Kuckreja, Akin Gump, Aug 2005 40. Jump up ^ Berle and Means' The Modern Corporation and Private Property, (1932, Macmillan)

41. Jump up ^ Ronald Coase, The Nature of the Firm (1937) 42. ^ Jump up to: a b Sytse Douma & Hein Schreuder (2013) "Economic Approaches to Organizations", 5th edition, London: Pearson [1] 43. Jump up ^ Eugene Fama and Michael Jensen The Separation of Ownership and Control, (1983, Journal of Law and Economics) 44. Jump up ^ see also the 1989 article by Kathleen Eisenhardt ("Agency theory: an assessment and review", Academy of Management Review) 45. Jump up ^ Crawford, Curtis J. (2007). The Reform of Corporate Governance: Major Trends in the U.S. Corporate Boardroom, 19771997. doctoral dissertation, Capella University. [2] 46. ^ Jump up to: a b Steven N. Kaplan, Executive Compensation and Corporate Governance in the U.S.: Perceptions, Facts and Challenges, Chicago Booth Paper No. 12-42, FamaMiller Center for Research in Finance, Chicago, July 2012 47. Jump up ^ Harvard Business Review, HBR (2000). HBR on Corporate Governance. Harvard Business School Press. ISBN 1-57851-237-9. 48. Jump up ^ Charan, Ram (2005). Boards that Deliver. Jossey-Bass. ISBN 0-7879-71391. 49. ^ Jump up to: a b Goergen, Marc, International Corporate Governance, Prentice Hall, Harlow, January, 2012, Chapter 3, ISBN 978-0-273-75125-0 50. Jump up ^ http://www.credit-suisse.com/research/en/ 51. Jump up ^ http://www.businessweek.com/magazine/content/03_45/b3857002.htm 52. Jump up ^ Programme Management: Managing Multiple Projects Successfully By Prashant Mittal, 53. Jump up ^ Sytse Douma & Hein Schreuder (2013) "Economic Approaches to Organizations", 5th edition, chapter 15, London: Pearson [3] 54. Jump up ^ Bhagat & Black, "The Uncertain Relationship Between Board Composition and Firm Performance", 54 Business Lawyer 55. Jump up ^ Goergen, Marc, International Corporate Governance, Prentice Hall, Harlow, January, 2012, pp. 104105, ISBN 978-0-273-75125-0 56. Jump up ^ Lin, Tom C. W., The Corporate Governance of Iconic Executives (2011). 87 Notre Dame Law Review 351 (2011). Available at SSRN: http://ssrn.com/abstract=2040922 57. ^ Jump up to: a b c Current Trends in Management 6.9 58. ^ Jump up to: a b c Current Trends in Management 59. Jump up ^ Does backdating explain the stock price pattern around executive stock option grants? Randall A. Herona, Erik Lieb| 12 September 2005. 60. Jump up ^ As Companies Probe Backdating, More Top Officials Take a Fall |Charles Forelle and James Bandler| October 12, 2006| wsj.com 61. Jump up ^ NYT Jeffrey Sonnenfeld The Jamie Dimon Witch Hunt May 8, 2013 62. Jump up ^ University of Cambridge-Magdalena Smith Should the USA follow the UK's lead and split the dual CEO/Chairperson role?

Further reading

Aglietta, Michel and Antoine Rebrioux (2005), Corporate Governance Adrift: A Critique of Shareholder Value, Cheltenham, UK, and Northampton, MA, USA: Edward Elgar. Arcot, Sridhar, Bruno, Valentina and Antoine Faure-Grimaud, "Corporate Governance in the U.K.: is the comply-or-explain working?" (December 2005). FMG CG Working Paper 001. Becht, Marco, Patrick Bolton, Ailsa Rell, "Corporate Governance and Control" (October 2002; updated August 2004). ECGI - Finance Working Paper No. 02/2002. Bowen, William, 1998 and 2004, The Board Book: An Insider's Guide for Directors and Trustees, New York and London, W.W. Norton & Company, ISBN 978-0-393-06645-6 Brickley, James A., William S. Klug and Jerold L. Zimmerman, Managerial Economics & Organizational Architecture, ISBN Cadbury, Sir Adrian, "The Code of Best Practice", Report of the Committee on the Financial Aspects of Corporate Governance, Gee and Co Ltd, 1992. Available online from [5] Cadbury, Sir Adrian, "Corporate Governance: Brussels", Instituut voor Bestuurders, Brussels, 1996. Claessens, Stijn, Djankov, Simeon & Lang, Larry H.P. (2000) The Separation of Ownership and Control in East Asian Corporations, Journal of Financial Economics, 58: 81-112 Clarke, Thomas (ed.) (2004) "Theories of Corporate Governance: The Philosophical Foundations of Corporate Governance," London and New York: Routledge, ISBN 0415-32308-8 Clarke, Thomas (ed.) (2004) "Critical Perspectives on Business and Management: 5 Volume Series on Corporate Governance Genesis, Anglo-American, European, Asian and Contemporary Corporate Governance" London and New York: Routledge, ISBN 0415-32910-8 Clarke, Thomas (2007) "International Corporate Governance " London and New York: Routledge, ISBN 0-415-32309-6 Clarke, Thomas & Chanlat, Jean-Francois (eds.) (2009) "European Corporate Governance " London and New York: Routledge, ISBN 978-0-415-40533-1 Clarke, Thomas & dela Rama, Marie (eds.) (2006) "Corporate Governance and Globalization (3 Volume Series)" London and Thousand Oaks, CA: SAGE, ISBN 978-14129-2899-1 Clarke, Thomas & dela Rama, Marie (eds.) (2008) "Fundamentals of Corporate Governance (4 Volume Series)" London and Thousand Oaks, CA: SAGE, ISBN 978-14129-3589-0 Colley, J., Doyle, J., Logan, G., Stettinius, W., What is Corporate Governance ? (McGraw-Hill, December 2004) ISBN Crawford, C. J. (2007). Compliance & conviction: the evolution of enlightened corporate governance. Santa Clara, Calif: XCEO. ISBN 0-9769019-1-9 ISBN 978-0-9769019-1-4 Denis, D.K. and J.J. McConnell (2003), International Corporate Governance. Journal of Financial and Quantitative Analysis, 38 (1): 136. Dignam, A and Lowry, J (2006) Company Law, Oxford University Press ISBN 978-019-928936-3

Douma, Sytse and Hein Schreuder (2013), "Economic Approaches to Organizations", 5th edition. London: Pearson [6] ISBN 0273735292 ISBN 9780273735298 Easterbrook, Frank H. and Daniel R. Fischel, The Economic Structure of Corporate Law, ISBN Easterbrook, Frank H. and Daniel R. Fischel, International Journal of Governance, ISBN Erturk, Ismail, Froud, Julie, Johal, Sukhdev and Williams, Karel (2004) Corporate Governance and Disappointment Review of International Political Economy, 11 (4): 677713. Feltus, Christophe; Petit, Michael; Vernadat, Franois. (2009). Refining the Notion of Responsibility in Enterprise Engineering to Support Corporate Governance of IT, Proceedings of the 13th IFAC Symposium on Information Control Problems in Manufacturing (INCOM'09), Moscow, Russia Garrett, Allison, "Themes and Variations: The Convergence of Corporate Governance Practices in Major World Markets," 32 Denv. J. Intl L. & Poly. Goergen, Marc, International Corporate Governance, (Prentice Hall 2012) ISBN 978-0273-75125-0 Holton, Glyn A (2006). Investor Suffrage Movement, Financial Analysits Journal, 62 (6), 1520. Hovey, M. and T. Naughton (2007), A Survey of Enterprise Reforms in China: The Way Forward. Economic Systems, 31 (2): 138156. Khalid Abu Masdoor (2011), Ethical Theories of Corporate Governance. International Journal of Governance, 1 (2): 484492. Kroszner, Randall S. (2008). "Corporate Governance". In David R. Henderson (ed.). Concise Encyclopedia of Economics (2nd ed.). Indianapolis: Library of Economics and Liberty. ISBN 978-0865976658. OCLC 237794267. La Porta, R., F. Lopez-De-Silanes, and A. Shleifer (1999), Corporate Ownership around the World. The Journal of Finance, 54 (2): 471517. http://onlinelibrary.wiley.com/doi/10.1111/0022-1082.00115/abstract Low, Albert, 2008. "Conflict and Creativity at Work: Human Roots of Corporate Life, Sussex Academic Press. ISBN 978-1-84519-272-3 Monks, Robert A.G. and Minow, Nell, Corporate Governance (Blackwell 2004) ISBN Monks, Robert A.G. and Minow, Nell, Power and Accountability (HarperBusiness 1991), full text available online Moebert, Jochen and Tydecks, Patrick (2007). Power and Ownership Structures among German Companies. A Network Analysis of Financial Linkages [7] Murray, Alan Revolt in the Boardroom (HarperBusiness 2007) (ISBN 0-06-088247-6) Remainder OECD (1999, 2004) Principles of Corporate Governance Paris: OECD zekmeki, Abdullah, Mert (2004) "The Correlation between Corporate Governance and Public Relations", Istanbul Bilgi University. Sapovadia, Vrajlal K., "Critical Analysis of Accounting Standards Vis--Vis Corporate Governance Practice in India" (January 2007). Available at SSRN: http://ssrn.com/abstract=712461 Shleifer, A. and R.W. Vishny (1997), A Survey of Corporate Governance. Journal of Finance, 52 (2): 737783. http://onlinelibrary.wiley.com/doi/10.1111/j.15406261.1997.tb04820.x/abstract

Skau, H.O (1992), A Study in Corporate Governance: Strategic and Tactic Regulation (200 p) Sun, William (2009), How to Govern Corporations So They Serve the Public Good: A Theory of Corporate Governance Emergence, New York: Edwin Mellen, ISBN 978-07734-3863-7. Touffut, Jean-Philippe (ed.) (2009), Does Company Ownership Matter?, Cheltenham, UK, and Northampton, MA, USA: Edward Elgar. Contributors: Jean-Louis Beffa, Margaret Blair, Wendy Carlin, Christophe Clerc, Simon Deakin, Jean-Paul Fitoussi, Donatella Gatti, Gregory Jackson, Xavier Ragot, Antoine Rebrioux, Lorenzo Sacconi and Robert M. Solow. Tricker, Bob and The Economist Newspaper Ltd (2003, 2009), Essentials for Board Directors: An AZ Guide, Second Edition, New York, Bloomberg Press, ISBN 978-157660-354-3. World Business Council for Sustainable Development WBCSD (2004) Issue Management Tool: Strategic challenges for business in the use of corporate responsibility codes, standards, and frameworks

External links
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Arthur and Toni Rembe Rock Center for Corporate Governance at Stanford University Chartered Institute of Personnel and Development (CIPD) resources on corporate governance Corporations, Governance & Society Research Group at The Australian National University Global Corporate Governance Forum The Harvard Law School Program on Corporate Governance Kozminski Center for Corporate Governance at Kozminski University, Poland The Millstein Center for Corporate Governance and Performance at the Yale School of Management Standard & Poor's Governance Services (GAMMA Governance Scores) UTS Centre for Corporate Governance at the University of Technology Sydney, Australia Weinberg Center for Corporate Governance University of Delaware World Bank Corporate Governance Reports [hide]

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A History of Business Ethics

By Richard T. De George The term 'business ethics' is used in a lot of different ways, and the history of business ethics will vary depending on how one conceives of the object under discussion. The history will also vary somewhat on the historianhow he or she sees the subject, what facts he or she seeks to discover or has at hand, and the relative importance the historian gives to those facts. Hence the story I'm going to tell will be somewhat different from the story someone else might tell in various particulars, and I hope that instead of being a dull recitation of facts it might in fact prompt some discussion at the end by those who would tell a somewhat different story. The story I will tell has three strands, because I believe the term business ethics is used in at least three different, although related, senses. Which sense one chooses therefore gives priority to nature of the history of the topic. The primary sense of the term refers to recent developments and to the period, since roughly the early 1970s, when the term 'business ethics' came into common use in the United States. Its origin in this sense is found in the academy, in academic writings and meetings, and in the development of a field of academic teaching, research and publication. That is one strand of the story. As the term entered more general usage in the media and public discourse, it often became equated with either business scandals or more broadly with what can called "ethics in business." In this broader sense the history of business ethics goes back to the origin of business, again taken in a broad sense, meaning commercial exchanges and later meaning economic systems as well. That is another strand of the history. The third stand corresponds to a third sense of business ethics which refers to a movement within business or the movement to explicitly build ethics into the structures of corporations in the form of ethics codes, ethics officers, ethics committees and ethics training. The term, moreover, has been

adopted world-wide, and its meaning in Europe, for instance, is somewhat different from its meaning in the United States. The "ethics in business" sense of business ethics In this broad sense ethics in business is simply the application of everyday moral or ethical norms to business. Perhaps the example from the Bible that comes to mind most readily is the Ten Commandments, a guide that is still used by many today. In particular, the injunctions to truthfulness and honesty or the prohibition against theft and envy are directly applicable. A notion of stewardship can be found in the Bible as well as many other notions that can be and have been applied to business. Other traditions and religions have comparable sacred or ancient texts that have guided people's actions in all realms, including business, for centuries, and still do. If we move from religion to philosophy we have a similar long tradition. Plato is known for his discussions of justice in the Republic, and Aristotle explicitly discusses economic relations, commerce and trade under the heading of the household in his Politics. His discussion of trade, exchange, property, acquisition, money and wealth have an almost modern ring, and he makes moral judgments about greed, or the unnatural use of one's capacities in pursuit of wealth for its own sake, and similarly condemns usury because it involves a profit from currency itself rather than from the process of exchange in which money is simply a means.1 He also gives the classic definition of justice as giving each his due, treating equals equally, and trading equals for equals or "having an equal amount both before and after the transaction."2 In the West, after the fall of Rome, Christianity held sway, and although there were various discussions of poverty and wealth, ownership and property, there is no systematic discussion of business except in the context of justice and honesty in buying and selling. We see this, for instance, in Thomas Aquinas's discussion of selling articles for more than they are worth and selling them at a higher price than was paid for them3 and in his discussion of, and, following Aristotle's analysis, his condemnation of usury.4 Nonetheless he justified borrowing for a good end from someone ready to lend at interest. Luther, Calvin, and John Wesley, among other Reformation figures also discussed trade and business and led the way in the development of the Protestant work ethic.5 R. H. Tawney's Religion and the Rise of Capitalism6 argues persuasively that religion was an essential part in the rise of individualism and of commerce as it developed in the modern period. The modern period, however, sought the divorce of the religious from the secular and politics from religion. In the process, economics and economic activity were similarly divorced from religion and joined with politics to form what was known as political-economy. John Locke developed the classic defense of property as a natural right. For him, one acquires property by mixing his labor with what he finds in nature.7 Adam Smith is often thought of as the father of modern economics with his An Inquiry into the Nature and Causes of the Wealth of Nations. Smith develops Locke's notion of labor into a labor theory of value. In modern times commentators have interpreted him as a defender of laissez-faire economics, and put great emphasis on his notion of the invisible hand. Yet the commentators often forget that Smith was

also a moral philosopher and the author of The Theory of Moral Sentiments. For him the two realms were not separate. John Stuart Mill, Immanuel Kant, G. W. F. Hegel all wrote on economic matters and just distribution. Karl Marx, however, stands out as the most trenchant critic of capitalism as it had developed up through the Nineteenth Century, and Marx's critique in one form or another continues up to today, even when not attributed to Marx. Marx claimed that capitalism was built on the exploitation of labor. Whether this was for him a factual claim or a moral condemnation is open to debate; but it has been taken as a moral condemnation since 'exploitation' is a morally charged term and for him seems clearly to involve a charge of injustice. Marx's claim is based on his analysis of the labor theory of value, according to which all economic value comes from human labor. The only commodity not sold at its real value, according to Marx, is human labor. Workers are paid less than the value they produce. The difference between the value the workers produce and what they are paid is the source of profit for the employer or the owner of the means of production. If workers were paid the value they produced, there would be no profit and so capitalism would disappear. In its place would be socialism and eventually communism, in which all property is socially (as opposed to privately) owned, and in which all members of society would contribute according to their ability and receive according to their needs. The result would be a society (and eventually a world) without exploitation and also without the alienation that workers experience in capitalist societies. Marx's notion of exploitation was developed by Lenin in Imperialism: The Highest Stage of Capitalism, in which he claims that the exploitation of workers in the developed countries has been lessened and the workers' conditions have improved because the worst exploitation has been exported to the colonies. His criticism has been adapted by many contemporary critics who claim that multinational corporations derive their profits from the exploitation of workers in less developed countries. Marx appealed to the workers of his time and helped start the labor movement, which improved the situation of the workingman. Marx's collaborator, Frederich Engels, saw the world as divided between those who follow Marx and those who follow religion, and the Marxists sought the hearts and minds of the workers. Refusing to yield the moral high ground, Pope Leo XIII in 1891 issued the first of the papal encyclicals on social justice, Rerum Novarum. As opposed to Marx, it justified private property, while seeking the answer to exploitation in the notion of a just wage, which was one sufficient "to support a frugal and well-behaved wage-earner," his wife and his children.8 Later popes followed Leo's example. Pope Pius XI in 1931 wrote Quadragesimo Anno, which morally attacked both Soviet socialism and laissez-faire capitalism, a theme continued by Pope John Paul II in Laborem Exercens (1981) and Centesimus Annus (1991). The U. S. Catholic Bishops in 1984 issued a Pastoral Letter on the U.S. Economy along the same lines, although more open to the U. S. free enterprise system. The aim of the encyclicals was not to propose any particular economic system but to insist that any system should not be contrary to Christian moral principles and should improve the conditions of the masses of humanity, especially of the poor and the least advantaged. Hence although the popes were critical of existing economic structures, the emphasis in the pulpits was still primarily on individuals living up to the demands of morality, including the giving of charity to those in need.

The same is true of the Protestant tradition as of the Catholic, even though there is no central authority to issue documents such as the encyclicals. Perhaps the most influential protestant figure in this regard was Reinhold Niebuhr whose trenchant critique of capitalism in Moral Man and Immoral Society9 became the basis for courses in seminaries and schools of theology. In 1993 the Parliament of the World's Religions adopted a Declaration of a Global Ethic10 that condemned "the abuses of the Earth's ecosystems," poverty, hunger, and the economic disparities that threaten many families with ruin. The idea of ethics in business continues until the present day. In general, in the United States this focuses on the moral or ethical actions of individuals. It is in this sense also that many people, in discussing business ethics, immediately raise examples of immoral or unethical activity by individuals. Included with this notion, however, is also the criticism of multinational corporations that use child labor or pay pitifully low wages to employees in less developed countries or who utilize suppliers that run sweat shops. Many business persons are strongly influenced by their religious beliefs and the ethical norms that they have been taught as part of their religion, and apply these norms in their business activities. Aaron Feuerstein is a prime example of someone whose actions after fire destroyed almost all of his Malden Mills factory complex kept his workers on the payroll until he could rebuild. He has stated often and publicly that he just did what his Jewish faith told him was the right thing to do. This strand of the story is perhaps the most prominent in the thinking of the ordinary person when they hear the term business ethics. The media carries stories about Enron officials acting unethically and about the unethical activities of Arthur Andersen or WorldCom, and so on, and the general public takes this as representative of business ethics or of the need for it. What they mean is the need for ethics in business. Business Ethics as an Academic Field Business ethics as an academic field, just as business ethics as a corporate movement, have a more recent history. The second strand of the story that I shall tell has to do with business ethics as an academic field. The 1960s marked a changing attitude towards society in the United States and towards business. The Second World War was over, the Cold War was ever present, and the War in Viet Nam fostered a good deal of opposition to official public policy and to the so-called military-industrial complex, which came in for increasing scrutiny and criticism. The Civil Rights movement had caught the public imagination. The United States was becoming more and more of a dominant economic force. American-based multinational corporations were growing in size and importance. Big business was coming into its own, replacing small and medium-sized businesses in the societal image of business. The chemical industry was booming with innovation, and in its wake came environmental damage on a scale that had not previously been possible. The spirit of protest led to the environmental movement, to the rise of consumerism, and to criticism of multinational corporations.

Corporations, finding themselves under public attack and criticism, responded by developing the notion of social responsibility. They started social responsibility programs and spent a good deal of money advertising their programs and how they were promoting the social good. Exactly what "social responsibility" meant varied according to the industry and company. But whether it was reforestation or cutting down on pollution or increasing diversity in the workforce, social responsibility was the term used to capture those activities of a corporation that were beneficial to society and usually, by implication, that made up for some unethical or anti-social activity with which the company had been charged. The business schools responded by developing courses in social responsibility or social issues in managementcourses which continue to thrive today. For the most part, in the 1960s such courses put an emphasis on law, and the point of view of managers prevailed, although soon that of employees, consumers and the general public were added. The textbooks paid no systematic attention to ethical theory, and tended to be more concerned with empirical studies than with the development or defense of norms against which to measure corporate activity. The history of the social responsibility movement is a story in itself and one that different people are writing somewhat differently. One version, by Archie Carroll, describes social responsibility as a pyramid that encompasses the four types of responsibility that businesses have: At the bottom is economic, then legal, then ethical and then philanthropic. And although some representatives of corporate social responsibility claim that they did business ethics before business ethics became popular and although some claim that what they do is business ethics, that is not the story of business ethics I am going to tell today. Business ethics as an academic field emerged in the 1970s. Prior to this time there had been a handful of courses called by that name; and a few figures, such as Raymond Baumhart,11 who dealt with ethics and business. For the most part ethical issues, if they were discussed, were handled in social issues courses. Theologians and religious thinkers, as well as media pundits continued writing and teaching on ethics in business; professors of management continued to write and do research on corporate social responsibility. The new ingredient and the catalyst that led to the field of business ethics as such was the entry of a significant number of philosophers, who brought ethical theory and philosophical analysis to bear on a variety of issues in business. Business ethics emerged as a result of the intersection of ethical theory with empirical studies and the analysis of cases and issues. Norman Bowie dates the birth of business ethics as November 1974, with the first conference in business ethics, which was held at the University of Kansas, and which resulted in the first anthology used in the new courses that started popping up thereafter in business ethics.12 Whether one chooses that date or some other event, it is difficult to identify any previous period with the sort of concerted activity that developed in a short period thereafter. In 1979 three anthologies in business ethics appeared: Tom Beauchamp and Norman Bowie, Ethical Theory and Business; Thomas Donaldson and Patricia Werhane, Ethical Issues in Business: A Philosophical Approach; and Vincent Barry, Moral Issues in Business. In 1982 the first singleauthored books in the field appeared: Richard De George, Business Ethics; and Manuel G. Velasquez, Business Ethics: Concepts and Cases. The books found a ready market, and courses in business ethics both in philosophy departments and in schools of business developed rapidly. As they did, the number of textbooks increased exponentially.

The field developed very similarly to the field of medical ethics, which had emerged ten years earlier in the 1960s, and the name paralleled that of the earlier fieldalthough even whether the term "business ethics" should be adopted was discussed among the relatively small group that was engaged in starting what has become a field. The seminal work of John Rawls in 1971, A Theory of Justice, had helped make the application of ethics to economic and business issues more acceptable to academic philosophers than had previously been the case. Whereas most of those who wrote on social issues were professors of business, most of those who wrote initially on business ethics were professors of philosophy, some of whom taught in business schools. What differentiated business ethics as a field from social issues in management was 1) the fact that business ethics sought to provide an explicit ethical framework within which to evaluate business, and especially corporate activities. Business ethics as an academic discipline had ethics as its basis. While social responsibility could be and was defined by corporations to cover whatever they did that they could present in a positive light as helping society, ethics had implicit in it standards that were independent of the wishes of corporations. To that extent, 2) the field was at least potentially critical of business practicesmuch more so than the social responsibility approach had been. If we take Archie Carroll's pyramid, those in business ethics did not see ethics as coming after economics and law but as restraints on economic activity and as a source for justifying law and for proposing additional legal restraints on business when appropriate. As a result business ethics and business ethicists were not warmly received by the business community, who often perceived them as a threatsomething they could not manage, preaching by the uninformed who never had to face a payroll. The development of the field was far from easy, and those academics working in it initially also found a cool reception both from their colleagues in philosophy departments and from those in business and in business schools. The former typically did not see business as a philosophically interesting endeavor, and many of them had an anti-business mind-set. The latter questioned whether philosophers had anything of interest to bring to business. The initial efforts were tenuous, and more and more people entered the field who were often ill-informed, or who, in fact, adopted polemical attacks against or positions in defense of business. Many observers dismissed business ethics as a fad that would pass. Many misunderstood its aims and envisioned it as providing justification or a rationale for whatever business wanted to do. It took a number of years for the field to define itself, incorporate standards of scholarship and rigor, and become accepted. As a field, business ethics covered the ethical foundations of business, of private property, and of various economic systems. 3) Although the field was concerned with managers and workers as moral persons with responsibilities as well as rights, most attention was focused on the corporationits structure and activities, including all the functional areas of business, including marketing, finance, management, and production. Related issues, such as the environmental impact of business actions, were included in most courses and texts, as were, with increasing attention, the activities of multinational corporations. As a field, business ethics included a good deal, but not all, of what was covered in social issues courses and texts, as well as giving structure to discussions of ethics in business. As it emerged by the middle of the 1980s it was clearly interdisciplinary, with the lines between philosophy and business research often blurred.

Initial discussions of business ethics introduced students to two of the basic techniques of moral argumentation, that used by utilitarians (who hold that an action is right if it produces the greatest amount of good for the greatest number of people), and that used by deontologists (who claim that duty, justice and rights are not reducible to considerations of utility). Other approaches were soon introduced including natural law, virtue ethics (based on Aristotle), and the ethics of caring (often associated with a feminist approach to ethics). An initial philosophical discussion that arose concerned the moral status of corporations and whether one could appropriately use moral language with respect to them, or whether the only proper objects of moral evaluation were human beings and their actions. That controversy has not completely subsided, but most authors take into account the fact that most people do attribute actions and policies to corporations as well as to the individuals within them. What did the development of business ethics as an academic field add that common sense morality couldn't handle; and who was the target audience? Those in philosophy added a theoretical framework to the area that had been previously lacking. Within that framework they integrated both the personal responsibility approach that ethics in business emphasized and the social responsibility of business approach, which they pushed explicitly into the ethical realm by applying ethics to economic systems, to the institution of business, and especially to corporations. Common sense morality and the ethics in business approach that I described are fine for the ordinary, everyday aspect of ethics in business. Employees shouldn't steal from their employers, and companies shouldn't cheat their customers. No one needs an academic business ethicist to tell them that. And if that is all business ethics had to contribute, it would indeed be superfluous. But what the business ethicists could add is not only arguments that show why most common sense judgments are indeed correct, but also the tools by which the morality of new issues could be intelligently debated. They could and did also join that debatethe debate for instance on whether affirmative action is justifiable, and even more basically, what affirmative action means. Ethicists analyzed and defended workers' rights, the right to strike, the ethical status of comparable worth in the marketplace, what constitutes bribery and whistle blowing, and so on. One need only look at the journals for the wide variety of issues that have been clarified, discussed, and arguedoften to a conclusion. The moral status of leveraged buyouts, of greenmail, of outsourcing, of restructuring, of corporate governance raise complex issues to which ordinary common sense morality has no ready answers or obvious intuitive judgments. It is odd that no company would think of making a serious financial commitment without extensive study, but some people think that moral judgments should be made instantaneously and require no thought, study, debate or time. Levi-Strauss, long noted for governing by values, knew enough that it had a high level committee study whether it was appropriate to operate in China for three months before coming to a decision. If those in business ethics wrote only for themselves, however, one could well question the relevance of what they wrote to business. What they wrote helped inform a large number of teachers who teach business ethics, and in turn has influenced a large number of students who have gone on to be practitioners. Moreover, many of those in business have also turned to the writings of those in business ethics, or have asked them for guidance as consultants on issues or

for help in writing corporate codes or designing training programs. The media as well frequently turns to those in the field for guidance, help, or sound bites. Many of the academics in business ethics have made an effort to open a dialogue with those in business, and have frequently been successful in doing so. The audience, therefore, has been not only colleagues and students, but also corporate managers and the general public. Mediating between the academic in his or her office and the corporate executive have also been a host of non-academic consultants, many of whom use the scholarly material to become informed about the state of the art and the arguments for or against various positions. Some of these act not only as intermediaries but, in a sense, as translators, translating technical jargon into business-speak. The development of the field, moreover, was not restricted to textbooks and courses. What differentiates earlier sporadic and isolated writings and conferences on ethics in business from the development of business ethics after the mid-70s is that only in the latter period did business ethics become institutionalized on many levels. By the mid-1980s there were at least 500 courses in business ethics taught across the country to 40,000 students. Not only were there at least twenty textbooks in the area and at least ten casebooks, but there were also societies, centers and journals of business ethics. The Society for Business Ethics was started in 1980. The first meeting of the Society for Business Ethics was held in conjunction with the meeting of the American Philosophical Association in December in Boston. Other societies turned increasing attention to business ethics, including the Social Issues in Management Division of the Academy of Management, which had been established in 1976. Other societies emerged, such as the International Association for Business and Society. Still other societies, some specialized, and some general were formed as well. A number of European scholars became interested in the American developments and organized the European Business Ethics Network (EBEN), which held its first meeting in 1987. Many individual European nations in turn established their own ethics network or business ethics society. In general, the European approach to business ethics has placed more emphasis on economics and on social structures, with less emphasis on the activities of corporations as such, than the U. S. approach does. Both approaches were captured in the International Society for Business, Economics and Ethics, which was founded in 1989. That society in turn helped national groups throughout the world to develop local or regional societies of business ethics, so that now there are societies in a large number of both developed and less developed countries. Simultaneous with these developments were the founding of centers for business ethics at a variety of academic institutions, and the establishment of a number of journals dedicated to business ethics, in addition to those journals that carry articles in business ethics among others. The Bentley College Center for Business Ethics was founded in 1976 and continues as one of the leading business ethics centers. Over a dozen more appeared within the next ten years, and many others have been established since then around the United States and in countries around the world. The Markkula Center includes business ethics as one of its areas, as we well know. The first issue of the Journal of Business Ethics appeared in February 1982; the first issue of the Business Ethics Quarterly in January 1991; and the first issue of Business Ethics: A European Review in January 1992. A number of other journals in the field have appeared since then.

The field has continued to develop as business has developed. By the mid 1980s business had clearly become international in scope, and the topics covered by business ethics expanded accordingly. Thomas Donaldson's The Ethics of Business Ethics (New York: Oxford University Press, 1989) was the first systematic treatment of international business ethics, followed by Richard De George's Competing with Integrity in Internal Business (New York: Oxford University Press, 1993). The focus on multinational corporations has been broadened in the light of the globalization of business to include ethical issues relating to international organizations, such as the World Trade Organization. Similarly, just as business has moved more and more into the Information Age, business ethics has turned its attention to emerging issues that come from the shift. By 1990 business ethics was well established as an academic field. Although the academicians from the start had sought to develop contacts with the business community, the history of the development of business ethics as a movement in business, though related to the academic developments, can be seen to have a history of its own. Business Ethics as a Movement Business ethics as a movement refers to the development of structures internal to the corporation that help it and its employees act ethically, as opposed to structures that provide incentives to act unethically. The structures may include clear lines of responsibility, a corporate ethics code, an ethics training program, an ombudsman or a corporate ethics officer, a hot or help line, a means of transmitting values within the firm and maintaining a certain corporate culture, and so on. Some companies have always been ethical and have structured themselves and their culture to reinforce ethical behavior. Johnson & Johnson's well-known Credo was written and published by General Robert Wood Johnson in 1943. But most companies in the 1960s had paid little attention to developing such structures. That slowly began to change, and the change became a movement when more and more companies started responding to growing public pressure, media scrutiny, their own corporate consciences, and, perhaps most importantly, to legislation. We have already seen that big business responded to criticism in the 1960s by turning to corporate social responsibility, and the movement can be traced back to that period. The U. S. Civil Rights Act of 1964 was the first piece of legislation to help jump start the business ethics movement. The Act prohibited discrimination of the basis of race, color, religion or national origin in public establishments connected to interstate commerce, as well as places of public accommodation and entertainment. Many corporations added equal opportunity offices to their human resources department to ensure compliance, and in general the consciousness of business about discrimination, equal opportunity, and equal pay for equal work came to the fore. This in turn led to more consciousness of workers' rights in general, and of corporate America's need to respect them. The U. S. Occupational Safety and Health Act of 1970 enforced the mandate to take those aspects of workers' rights seriously. In the same year the Environmental Protection Act forced business to start internalizing the costs of what had previously been considered externalitiessuch as the discharge of toxic effluents from factory smokestacks. In 1977, following a series of scandals involving bribery by U. S. firms abroad including the Lockheed $12 million bribery case that led to the fall of the Japanese government at the time, the

U. S. government passed the Foreign Corrupt Practices Act. The Act was historic because it was the first piece of legislation that attempted to control the actions of U.S. corporations in foreign countries. The Act prohibited U. S. companies from paying large sums of money (or their equivalent) to high level government officials of other countries to obtain special treatment. A number of companies prior to the Act had already adopted the policy of refusing to pay bribes as a matter of ethical principle. IBM, among others, was known for adherence to this policy, as was Motorola. The Act forced all companies to live up to the already existing ethical norm. Its critics complained, however, that it put U. S. companies at an unfair disadvantage vis--vis companies from other countries that were permitted to pay bribes. The U. S. government applied what pressure it could to encourage other countries to follow its lead, and finally twenty years later the OECD countries agreed to adopt similar legislation. In 1978 General Motors and a group of other U. S. companies adopted what are known as the Sullivan Principles, which governed their actions in South Africa. The signatories agreed that they would not follow the discriminatory and repressive apartheid legislation in South Africa and would take affirmative action to try to undermine apartheid not only by not following the existing South African apartheid statutes, but also by lobbying the South African government for change. Adherence to the Principles was seen as a way by which American companies could ethically justify doing business in South Africa. They were adopted in part as a response to public pressure on the companies to leave South Africa. The Principles have become a model for other voluntary codes of ethical conduct by companies in a variety of other ethically questionable circumstances. By the 1980s many companies had started reacting to calls for ethical structures, and more and more started adopting ethical codes and instituting ethics training for their employees. Each wave of scandals, which seemed to occur every ten years or so, resulted in more pressure for companies to incorporate ethics into their structures. In 1984 the Union Carbide disaster at its plant in Bhopal, India, which killed thousands of people and injured several hundred thousand, focused world attention on the chemical industry. This led to the chemical industry's adopting a voluntary code of ethical conduct known as Responsible Care, which became a model for other industries. In 1986, in response to a series of reported irregularities in defense contracts, a special Commission Report on the situation led to the establishment of the Defense Industry Initiative (DII) on Business Ethics and Conduct, signed by thirty-two (it soon increased to fifty) major defense contractors. Each signatory agreed to have a written code of ethics, establish appropriate ethics training programs for their employees, establish monitoring mechanisms to detect improper activity, share their best practices, and be accountable to the public. The DII became the model for what has been the most significant governmental impetus to the business ethics movement, namely, the 1991 U. S. Federal Sentencing Guidelines for Corporations. That law took the approach of providing an incentive for corporations to incorporate ethical structures within their organizations. If a company could show that it had taken appropriate measures to prevent and detect illegal and unethical behavior, its sentence, if found guilty of illegal behavior, would be reduced considerably. Appropriate measures included having a code of ethics or of conduct, a high-placed officer in charge of oversight, an ethics training program, a monitoring and reporting system (such as a "hotline"), and an enforcement and response system. Fines that could reach up to $290 million could be reduced by up to 95

percent if a company could show bona fide institutional structures that were in place to help prevent unethical and illegal conduct. The result was a concerted effort on the part of most large companies to incorporate into their organizations the structures required. This led to the development of a corporate position known as the Corporate Ethics Officer, and in 1992 to the establishment of the Corporate Ethics Officer Association. The most recent legislative incentive to incorporate ethics in the corporation came in the Sarbanes-Oxley Act of 2002, passed as a result of a rash of scandals involving Enron, WorldCom, Arthur Andersen and other prominent corporations. The Act requires, among other things, that the CEO and CFO certify the fairness and accuracy of corporate financial statements (with criminal penalties for knowing violations) and a code of ethics for the corporation's senior financial officers, as well as requiring a great deal more public disclosure. Corporations have responded to legislative and popular pressure in a variety of ways. The language of social responsibility rather than explicitly ethical language is still probably the most commonly used. Self-monitoring of adherence to a corporation's stated principles and selfadopted standards is becoming more common, and some companies have voluntarily adopted monitoring of their practices, policies and plants by independent auditors. The notion of a Triple Bottom Line, which involves financial, social and environmental corporate reporting, has been adopted by a number of companies. Other popular reporting mechanisms include corporate environmental sustainability reports and social audits, which vary considerably in what is reported and how it is reported. Ethical investing is another aspect of the movement, and mangers of ethical investment funds have begun proposing stockholder proposals as a means of encouraging more ethical behavior on the part of corporations in which they own stock. Nor is the business ethics movement confined to the Unites States. Other countries have adopted legislation similar to that of the United States, and the UN has developed a voluntary Global Compact for Corporations. The Compact, which was endorsed by all governments, contains nine guiding principles, which focus on human rights, labor standards, and the protection of the environment. Over 1,500 companies world wide have joined the compact, and it seems likely that more and more will feel the pressure to become signatories and to abide by the required standards. The business ethics movement, like business ethics itself, has become firmly entrenched. The concern for ethics in business continues. Business ethics as an academic field contributes discussion forums, research and teaching that inform both ethics in business and the business ethics movement. The business ethics movement is responsive to the other two and in turn has interacted with them. All three together make up the history of business ethics in its broadest sense. From an academic perspective, looking back over the past thirty or so years, a lot has been accomplished. A historian deals with the past and not the future. But looking to the future, it is easy to see that there is still a lot to do. Both globalization and the march into the Information

Age are changing the way business is done and the ethical issues businesses face. If business ethics is to remain relevant, it must change its focus accordingly. If there is anything that the story I've told can teach us, it is that business ethics is neither a fad as some claimed early on, nor an oxymoron, as so many lamely joked. It is a vibrant, complex enterprise developing on many levels, with the three strands I've mentioned intertwining in complex, dynamic and fascinating ways. We can expect all three to remain vibrant and interacting for the foreseeable future. Notes 1. Aristotle, Politics, Book I, especially Ch. 8-10. 2. Aristotle, Nicomachean Ethics, ed. Roger Crisp (Cambridge: Cambridge University Press, 2000), p. 88. 3. Summa Theologiae, II-II, Question 77. 4. Question 78. 5. (See Max L. Stackhouse, Dennis P. McCann and Shirley J. Roels, with Preston N. Williams, eds., On Moral Business: Classical and Contemporary Resources for Ethics in Economic Life (Grand Rapids, Mich.: William B. Eerdmans Publishing Company, 1995). 6. New York: Harcourt, Brace and Co., 1926. 7. (John Locke, "Of Property," Second Treatise: An Essay Concerning the True Original, Extent and End of Civil Government). 8. Rerum Novarum, nos. 45-46. 9. New York: Scribner's, 1932. 10. Available at http://www.earthspirit.org/Parliament/parliamentstat.html. 11. "How Ethics Are Businessmen?," Harvard Business Review, 39 (4) (1961) and Clarence Walton Corporate Social Responsibilities (Belmont, CA: Wadsworth Publishing Co., 1967). 12. Norman E. Bowie, "Business Ethics," in New Directions in Ethics, ed. Joseph P. DeMarco and Richard M. Fox, New York: Routledge & Kegan Paul, 1986. References Aquinas, Thomas St., Summa Theologiae Aristotle, Politics; Nicomachean Ethics, ed. Roger Crisp, Cambridge: Cambridge University Press, 2000.

Barry, Vincent, Moral Issues in Business (Belmont, Calif.: Wadsworth, 1979). Beauchamp, Tom and Norman Bowie, Ethical Theory and Business ( Englewood Cliffs, NJ: Prentice-Hall, 1979; 6th ed, 2001) Baumhart, Raymond, "How Ethics Are Businessmen?," Harvard Business Review, 39 (4) (1961)). Bowie, Norman E., "Business Ethics," in New Directions in Ethics, ed. Joseph P. DeMarco and Richard M. Fox, New York: Routledge & Kegan Paul, 1986.) De George, Richard Business Ethics (N.Y.: Macmillan, 1982; 5th ed., Prentice-Hall, 1999). De George, Richard T., "The Status of Business Ethics: Past and Future," Journal of Business Ethics,6 (1987), pp. 201-211. De George, Richard, Competing with Integrity in Internal Business (New York: Oxford University Press, 1993) Donaldson, Thomas and Patricia Werhane, Ethical Issues in Business: A Philosophical Approach (Englewood Cliffs, NJ: Prentice-Hall, 1979; 7th ed., 2002) Donaldson, Thomas, The Ethics of Business Ethics (New York: Oxford University Press, 1989). John Paul II, Pope, Laborem Exercens (1981); Cenesimus Annus (1991). Lenin, V. I., Imperialism: The Highest Stage of Capitalism (1917). Leo XIII, Pope, Rerum Novarum, 1891. Locke, John, "Of Property," Second Treatise: An Essay Concerning the True Original, Extent and End of Civil Government. Niebuhr, Reinhold, Moral Man and Immoral Society (New York: Scribner's, 1932). Pius XI, Pope, Quadragesimo Anno (1931). Plato, Republic. Rawls, John, A Theory of Justice (Cambridge, Mass., Belknap Press of Harvard University Press, 1971). Smith, Adam, An Inquiry into the Nature and Causes of the Wealth of Nations; The Theory of Moral Sentiments.

Stackhouse, Max L., Dennis P. McCann and Shirley J. Roels, with Preston N. Williams, eds, On Moral Business: Classical and Contemporary Resources for Ethics in Economic Life (Grand Rapids, Mich.: William B. Eerdmans Publichsing Company, 1995). Tawney, R. H. Religion and the Rise of Capitalism (New York: Harcourt, Brace and Co., 1926). U. S. Catholic Bishops, "Economic Justice for All: Pastoral Letter on Catholic Social Teaching and the U.S. Economy," 1986. Velasquez, Manuel G, Business Ethics: Concepts and Cases (Englewood Cliffs, NJ: PrenticeHall, 1982; 5th ed., 2002) Walton, Clarence, Corporate Social Responsibilties (Belmont, Calif., Wadsworth Pub. Co.,1967). Richard T. De George is University Distinguished Professor of Philosophy and of Business Administration, and Director of the International Center for Ethics in Business at the University of Kansas. He is the author of over 180 articles and the author or editor of twenty books, including The Ethics of Information Technology and Business (2003); Business Ethics (1999), now in its fifth edition and also available in Japanese, Russian, Serbian and Chinese; and Competing With Integrity in International Business (Oxford, 1993), also translated into Chinese. He delivered this paper February 19, 2005, at "The Accountable Corporation," the third biennial global business ethics conference sponsored by the Markkula Center for Applied Ethics.

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Definition of 'Business

Ethics'
The study of proper business policies and practices regarding potentially controversial issues, such as corporate governance, insider trading, bribery, discrimination, corporate social responsibility and fiduciary responsibilities. Business ethics are often guided by law, while other times provide a basic framework that businesses may choose to follow in order to gain public acceptance.

Investopedia explains 'Business Ethics'

Business ethics are implemented in order to ensure that a certain required level of trust exists between consumers and various forms of market participants with businesses. For example, a portfolio manager must give the same consideration to the portfolios of family members and small individual investors. Such practices ensure that the public is treated fairly.