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The relationship between law, governance, social responsibility and ethics 
Law
 
Corporate governance
 
Social responsibility
 
Ethics
 
Rules individuals and 
companies 
must follow
. 
The 
minimum level of 
behaviour
society 
allows. 
Publicly listed 
companies only
are 
regulated. Others are 
encouraged
to follow 
'best practice'. 
No regulation
. 
Individuals and 
companies have a free 
choice.
Some social pressure
to act in a socially 
responsible manner. 
Values and principles
.
 
Individuals and 
companies are 
expected to follow
.
 
Adopting an ethical 
position is down to free 
choice. 
More regulation, less freedom of choice 
Less regulation, more freedom of choice 
From the table above, we can see that the law is highly regulated, corporate governance is less 
regulated and, social responsibility and ethics have no regulation, as adoption is down to free choice. 
6.2.2 Effect on corporate behaviour 
Perhaps more importantly, we should examine the effect each has on corporate behaviour. 
An important point to remember is that companies do not make decisions by themselves. Human 
individuals (usually the directors) make the significant policy choices. 
The following diagram demonstrates the interaction of law, ethics and social responsibility on the 
company.
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CHAPTER 7
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CORPORATE GOVERNANCE AND SOCIAL RESPONSIBILITY 
 
193 
PRESSURES
PRESSURES
EXTERNAL
INTERNAL
Director’s
ethics
Needs of
shareholders
Business needs to
appear socially 
responsible
Society’s
ethics
Law
Pressure for
social responsibility
Corporate governance
(decisions of directors)
We can see that many factors will influence the behaviour of a company. The main external influence is 
the law, as it sets the minimum level of behaviour expected. Society's ethical views and needs for social 
responsibility will have an influence, as companies will respect them as far as necessary to remain 
profitable. 
Directors are greatly influenced by the need to deliver the results that shareholders require, for example 
increasing the company's share price or dividend. To achieve this may require breaking their own 
personal ethical beliefs. 
Remember, businesses do not necessarily have to act ethically. In most cases they are run for the 
benefit of the owners (the shareholders) rather than for the benefit of society as a whole. 
PER performance objective PO4 requires you to contribute to the effective governance, risk 
management and control of an organisation. The material covered in this chapter will help in this 
context. 
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