Business Ethics
Concept of Business Ethics
Business ethics refers to the principles and values that guide behavior in the commercial world, ensuring that decisions and actions align with honesty, fairness, responsibility, and respect. It goes beyond legal compliance—focusing on doing what is right for employees, customers, communities, and the environment.
Ethical business practices cover areas like transparency in advertising, responsible sourcing, fair treatment of workers, and sustainable resource use.
In practice, business ethics help build trust, avoid reputational damage, and create long-term value.
For example, a Nepali company that avoids false product claims, pays fair wages, and uses eco-friendly packaging demonstrates its commitment to ethical conduct. Such businesses not only succeed financially but also contribute positively to society and build loyal relationships with stakeholders.
Myths About Business Ethics
1. “Business is the business of business.”
Myth: The only goal of business is to make profit—ethics is a distraction. Reality: While profit is essential, businesses also have responsibilities toward society, employees, and the environment.
Example: Imagine a cement factory in Hetauda that dumps waste into a nearby river to cut costs. Sure, it saves money—but at what cost? The community suffers, and the brand loses trust. Ethical businesses like CG Holdings balance profit with social and environmental responsibility, which builds long-term success.
2. “Business ethics is more a matter of religion than management.”
Myth: Ethics is about personal faith, not business strategy. Reality: Ethics is a management discipline—it involves setting values, policies, and behavior standards for the entire organization.
Example: A Kathmandu-based tech startup creates a code of conduct to prevent data misuse. This isn’t about religion—it’s about managing trust and risk. Just like budgeting or HR, ethics needs structure and leadership.
3. “Our employees are ethical, so we don’t need to focus on business ethics.”
Myth: Good people automatically make good decisions. Reality: Even ethical people face gray areas and pressure. Without guidance, they may make poor choices unintentionally.
Example: A cashier at a supermarket in Pokhara notices a pricing error that benefits the store. Should they report it? Without clear ethical training, they might stay silent. Companies like Himalayan Java train staff on ethical dilemmas to ensure consistent behavior.
4. “We follow the law, so we don’t need ethics.”
Myth: Legal compliance is enough. Reality: Law is the minimum standard—ethics goes beyond. Something can be legal but still unethical.
Example: A company legally avoids taxes using loopholes, like in the Ncell tax controversy. Though technically legal at first, the public saw it as unethical, leading to protests and court rulings. Ethics builds reputation, not just legal safety.
5. “Business ethics and social responsibility are the same.”
Myth: CSR and ethics are interchangeable. Reality: CSR is a part of ethics, but ethics also includes internal behavior—like honesty, fairness, and transparency.
Example: A company donates to a school (CSR) but underpays its workers or manipulates accounts. That’s not ethical. True ethics means doing the right thing inside and outside the organization.
6. “Ethics can’t be managed.”
Myth: Ethics is too personal or abstract to control. Reality: Ethics can be managed through codes of conduct, training, leadership modeling, and accountability systems.
Example: Banks in Nepal, like Nabil Bank, have ethics committees and whistleblower policies. These systems help manage ethical behavior just like finances or operations.
7. “Business ethics is a discipline best left to philosophers and academics.”
Myth: Ethics is too theoretical for real business. Reality: Ethics is practical and essential for managers, HR, marketing, and leadership.
Example: A manager at a logistics company in Birgunj faces a dilemma: delay delivery to avoid overloading a truck or meet the deadline and risk safety. This isn’t philosophy—it’s a real-world ethical decision that affects lives and reputation.
Causes and consequences of Ethical Problems in Business
Causes of Ethical Problems in Business
1. Greed and Pressure for Profit - When companies prioritize short-term profits over long-term ethics, decision-makers may cut corners, ignore safety standards, or exploit resources. For example, a construction firm in Kathmandu might use low-quality materials to reduce costs—putting public safety at risk just to boost margins.
2. Lack of Ethical Leadership - If top-level managers don’t model ethical behavior, it sends a signal that integrity is optional. This lack of accountability allows unethical practices to grow unchecked. In some Nepali cooperatives, misuse of member funds occurred largely because leaders failed to set honest, transparent examples.
3. Weak Corporate Governance - Without strong systems for oversight and checks and balances, businesses may fall into corruption or inefficiency. Poor governance—like political interference or lack of audits—has repeatedly affected organizations such as Nepal Airlines, leading to operational failure and distrust.
4. Ambiguity in Rules and Expectations - Unclear ethics policies leave room for misinterpretation and manipulation. Employees may act unethically without realizing it or bend rules for gain. A local example includes retailers advertising fake discounts—like “flat 50% off”—without actually reducing prices, misleading consumers.
5. Cultural or Peer Pressure - In workplaces where unethical practices are normalized, individuals may feel pressured to follow the crowd. If “everyone pays a bribe to win a contract,” employees may justify unethical actions as part of the system, even if they personally disagree.
Consequences of Ethical Problems in Business
1. Reputation Damage - Ethical failures can destroy public trust and customer loyalty. Once a company is perceived as dishonest or exploitative, recovering its image becomes difficult. The Ncell tax controversy in Nepal is a case where public backlash significantly harmed the brand’s reputation.
2. Legal Trouble and Financial Penalties - Businesses engaging in unethical or illegal behavior often face fines, lawsuits, or investigations. The gold smuggling case in Nepal is a vivid example—it triggered arrests, disrupted entire supply chains, and stained the business environment for others.
3. Low Employee Morale and High Turnover - Employees in unethical workplaces feel undervalued, unsafe, or conflicted—leading to low motivation or resignations. In factories facing wage theft or poor safety conditions, workers may protest or leave, impacting productivity and stability.
4. Loss of Investor Confidence - Unethical behavior makes companies risky investments. If a startup manipulates data to attract funding, investors may pull out or avoid similar ventures—damaging not only one business but the entire ecosystem's credibility.
5. Business Failure or Collapse - In severe cases, ongoing ethical violations lead to a company’s shutdown. GITCO Nepal, once a garment exporter, lost international contracts due to poor labor practices and ethical breaches—eventually forcing the business to close its doors.
Major Theories and Frameworks Governing Business Ethics
1. Utilitarianism (Consequentialism) - Utilitarianism focuses on outcomes and promotes decisions that produce the greatest good for the greatest number. In business, it’s often used when leaders must balance gains and losses. For instance, a company might lay off a small percentage of workers to prevent bankruptcy and save remaining jobs—emphasizing the overall benefit. In Nepal, a hydropower project relocating a few households to provide electricity to thousands reflects utilitarian logic. While controversial, the choice is seen as ethical if the societal gain outweighs individual sacrifice.
2. Deontology (Duty-Based Ethics) - Deontology centers on duties, rules, and principles—regardless of consequences. An action is ethical if it follows moral obligations, even if the outcome is unfavorable. A business refusing to pay bribes, despite losing a contract, upholds this approach. In Nepal, when an auditing firm refuses to manipulate reports under client pressure because of professional codes, it reflects deontological thinking—prioritizing right conduct over profit.
3. Virtue Ethics - Virtue ethics highlights the importance of personal character traits like honesty, empathy, and courage. Rather than focusing on rules or outcomes, it asks, “What would a good person do?” In business, this means fostering a culture of integrity. A CEO who consistently acts with fairness sets a positive example. In Nepal, a social entrepreneur who runs a cooperative to empower women—putting community before personal profit—embodies virtue ethics.
4.Justice and Fairness Theory - Justice theory focuses on equal treatment, fair distribution of resources, and consistency. Businesses guided by this framework promote equal opportunities and protect against bias or exploitation. An organization paying fair wages regardless of background exemplifies this model. In Kathmandu, an NGO promoting inclusive hiring and leadership diversity showcases commitment to fairness.
5.Relativism - Relativism argues that ethical judgments are shaped by cultural norms, individual beliefs, and specific contexts—meaning there’s no universal “right” or “wrong.” What’s considered ethical in one society may be viewed differently in another, and that's okay within the relativist view. For example, while tipping in restaurants might be seen as respectful in one culture, it could be considered rude or even offensive in another—relativism acknowledges both as valid within their respective contexts.
6. Stakeholder Theory - This theory proposes that ethical decisions must consider the needs of all stakeholders—not just shareholders. Businesses should balance interests of employees, suppliers, customers, and communities. A company that involves local voices in its decisions reflects this model. A tea estate in Ilam, Nepal that ensures fair wages, safe conditions, and environmental sustainability shows stakeholder inclusiveness—supporting long-term trust and shared value.
7. Corporate Social Responsibility (CSR) Framework - CSR goes beyond compliance, encouraging businesses to positively impact society and the environment. It includes activities like ethical labor practices, sustainability, and philanthropy. Ethical firms use CSR strategically—not just for image, but to support long-term societal well-being. In Nepal, the CG Foundation’s work in education and disaster relief shows how CSR can align business success with community development.
8.Triple Bottom Line (TBL) - It is a business ethics framework that evaluates success in three areas: People (social impact), Planet (environmental sustainability), and Profit (financial performance). It encourages companies to balance earning money with treating people fairly and protecting the environment. For example, a business that pays fair wages, uses eco-friendly packaging, and reinvests profits into education meets all three TBL goals.
Corporate Governance
Concept of Corporate Governance
Corporate governance refers to the system of rules, practices, and processes by which a company is directed and controlled. It defines the structure of relationships between a company’s management, its board of directors, shareholders, and other stakeholders like employees, customers, suppliers, and the community.
Key Objectives of Corporate Governance
- Ensure transparency in decision-making
- Promote accountability of leadership
- Protect the interests of shareholders and stakeholders
- Encourage ethical business practices
- Support long-term sustainability and value creation
Core Components
- Board of Directors – The main governing body responsible for oversight and strategic direction.
- Management – Executes the board’s vision and handles day-to-day operations.
- Shareholders – Owners of the company who expect returns and ethical conduct.
- Stakeholders – Broader group including employees, customers, suppliers, and society.
Essential Elements of Good Corporate Governance
A well-functioning corporate governance system is built on several essential principles:
1.Transparency - Transparency refers to the open sharing of accurate, timely, and relevant information about a company’s operations, finances, and decisions. It builds trust among stakeholders by allowing them to make informed judgments. For example, Nepal Rastra Bank maintains transparency by regularly publishing financial statements and policy updates that enhance public confidence in the banking system.
2. Accountability - Accountability means that decision-makers within an organization are responsible for their actions and must answer for their outcomes. It prevents misuse of power and ensures that performance is evaluated fairly. For instance, if a CEO misuses company funds, the board must step in with audits or legal remedies to uphold ethical standards.
3. Fairness - Fairness ensures that all stakeholders—whether employees, customers, or investors—are treated equitably and without bias. It upholds justice and prevents discriminatory practices. A Nepali company offering equal pay to all employees, regardless of caste or gender, demonstrates fairness in action.
4. Responsibility - Responsibility involves acting with care toward society and the environment. It includes ethical labor practices, sustainable development, and community welfare. A cement factory in Hetauda that installs dust control systems to limit pollution exemplifies corporate responsibility by valuing public health.
5. Independence - Independence in governance means including board members who are not involved in daily management. These directors provide unbiased oversight and help prevent conflicts of interest. For example, Nabil Bank appoints independent members to its board, ensuring that strategic decisions remain objective.
6. Ethical Conduct - Ethical conduct refers to the cultivation of an integrity-driven culture through codes of ethics, leadership example, and employee training. It promotes honesty, respect, and social responsibility. CG Holdings encourages ethical behavior by aligning its policies with CSR efforts and internal integrity programs.
7. Stakeholder Engagement - This principle emphasizes the inclusion of all relevant groups in decision-making processes. Engaging stakeholders builds trust and improves community relations. A hydropower project in Nepal that holds public consultations before construction reflects this by valuing local voices.
8. Risk Management - Risk management is the proactive identification and control of potential threats that could disrupt business operations. It enhances resilience and sustainability. Himalayan Bank, for instance, maintains a risk management team dedicated to assessing financial and operational risks—helping prevent crises.
Evolution of Corporate Governance
1. Early Informal Practices (Pre-17th Century) - In the earliest phase of business governance, practices were informal and based largely on trust, kinship, and local customs. Enterprises were owner-managed, with no structured boards or regulations. Merchants relied on community relationships, and verbal agreements replaced written rules. For instance, in medieval Nepal and India, traders and guilds operated under shared norms, where reputation was the primary accountability mechanism.
2. Emergence of Joint Stock Companies (17th–19th Century) - This era marked a significant shift as businesses began embracing shared ownership through joint stock companies. Investors could pool capital while enjoying limited liability—a foundational innovation in business structure. Governance became more formal, with shareholder rights and corporate charters shaping accountability. Companies like the British East India Company set the tone for board-based oversight, influencing governance in colonized regions including South Asia.
3. Separation of Ownership and Management (Late 19th – Early 20th Century) - As businesses grew, ownership and management became distinct roles. Shareholders entrusted professional managers with operational control, creating a need for monitoring systems. This separation led to the “principal–agent” dilemma, where managers might prioritize personal interest over shareholder goals. In places like the U.S., large firms such as General Electric developed board structures and reporting mechanisms to bridge this trust gap.
4. Development of Modern Corporations (20th Century) - With corporate expansion and globalization, governance grew more structured and layered. Institutional investors demanded transparency, and public companies adopted annual disclosures, board committees, and independent directors. In Nepal, the Company Act of 1997 formalized corporate governance with guidelines on board formation, shareholder rights, and statutory audits—laying the foundation for ethical business practices.
5. Corporate Scandals and Regulatory Reforms (Late 20th – Early 21st Century) - High-profile scandals like Enron (USA), WorldCom, and Satyam (India) revealed deep weaknesses in corporate oversight. These failures prompted sweeping legal reforms, such as the Sarbanes–Oxley Act and SEBI's new guidelines, emphasizing transparency, audit controls, and whistleblower protection. Globally, businesses became more aware of the consequences of weak governance and the need for stricter ethical compliance.
6. Globalization and the Rise of ESG (21st Century) - Modern governance transcends profits, incorporating Environmental, Social, and Governance (ESG) criteria. Today’s businesses are evaluated not only by shareholders but also by communities, governments, and global watchdogs. Sustainability, diversity, and ethical sourcing are at the core. In Nepal, companies like Nabil Bank and Himalayan Distillery have embraced ESG principles, launching green financing and reporting initiatives that reflect this global shift.
Corporate Governance Evolution in Nepal
Nepal’s journey mirrors global patterns with localized adaptations.
- 1990s: Introduction of key corporate laws inspired by international models.
- 2000s: Banking reforms strengthened oversight, especially through Nepal Rastra Bank's regulatory role.
- 2010s–Present: NRB has emphasized ethical banking, financial transparency, and corporate disclosure, aligning Nepal’s governance standards with global expectations.
Similarities and Differences Between Business Ethics and Corporate Governance
Similarities:
- Focus on Ethical Conduct – Both business ethics and corporate governance emphasize integrity, fairness, and responsible decision-making.
- Stakeholder Consideration – They prioritize the interests of employees, customers, investors, and society.
- Legal and Regulatory Compliance – Both require adherence to laws and ethical standards to prevent misconduct.
- Sustainability and Social Responsibility – They promote sustainable practices that benefit society and the environment.
Differences:
Significance of Business Ethics and Corporate Governance
Significance of Business Ethics:
- Builds Trust and Reputation – Ethical businesses earn public confidence, leading to customer loyalty.
- Prevents Legal Issues – Following ethical principles reduces risks of fraud, lawsuits, and fines.
- Enhances Employee Satisfaction – A workplace driven by ethical values fosters motivation and job satisfaction.
- Ensures Long-Term Sustainability – Ethical companies maintain a competitive advantage by prioritizing social responsibility.
Significance of Corporate Governance:
- Protects Shareholder Rights – Governance mechanisms prevent fraud and mismanagement.
- Enhances Financial Stability – Proper oversight ensures sound financial decision-making and risk management.
- Encourages Transparency and Accountability – Public disclosure of financial and managerial decisions builds credibility.
- Drives Long-Term Growth and Investment – Well-governed firms attract investors and strengthen economic performance.
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